Extraordinary Popular Delusions and the Madness of Crowds or The Wisdom of Crowds ?

  These are two of my favorite books :

In 2004 , James Surowiecki ( an American Journalist ) published a book called “ The Wisdom of Crowds “ which talked about the aggregation of information in group , resulting in decisions that often better than it could have been made by any single member of the group.

The Wisdom of Crowds is generally traced back to an observation by Charles Darwin’s cousin Francis Galton in 1907. Galton pointed out that the average of all the entries in a ‘guess the weight of the ox’ competition at a country fair was amazingly accurate – beating not only most of the individual guesses but also those of alleged cattle experts. This is the essence of the wisdom of crowds: their average judgement converges on the right solution.




On contrary , this book “ Extraordinary Popular Delusion and Madness of Crowds “ by Charles MacKay wrote about the crowd psychology that drive numerous “ National Delusions, “ Peculiar Follies “ and “ Psychology Delusions” , mentioning among others manias like “The Tulip Mania “, The South Sea Company Bubble. “

“In reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first...Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper... Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one”

The quotation is taken from its preface. If it sounds amazingly relevant to our current economic situation, it's because it is. It may be the most relevant book you will ever read.
Crowd psychology can create an emotional feedback loop whereby we may just want to hear only what we want. For MacKay, crowds were never wise, they were never even reasonable and collective judgement were doom to be extreme.”

In recent years, researchers have spent a significant amount of time and effort teasing apart the factors that make crowds stupid. One important factor turns out to be the way members of a crowd influence each other.

It turns out that if a crowd offers a wide range of independent estimates, then it is more likely to be wise. But if members of the crowd are influenced in the same way, for example by each other or by some external factor, then they tend to converge on a biased estimate. In this case, the crowd is likely to be stupid. These biases can really skew the result and could be the way that destroy the wisdom of a crowd.


In another classic book written by Gustave Le Bon in 1895 :” The Crowd : A study of the Popular Mind “, Le Bon argued that “crowd was more than just the sum of its members, instead, it was a kind of independent organism , it had an identity and a will of its own, and it often act in ways that no one within the crowd intended. When the crowd did act, it invariably acted foolishly. A crowd might be brave or cowardly or cruel, but it could never be smart.”


The wisdom ( or stupidity )  of crowd may also be determined by the result which “the crowd “ desired and wanted to see.



Do you think that the voting of Donald Trump as 45th President of US as “Wisdom of Crowd “ or Dow 20,000 as “Extraordinary Popular Delusions and Madness of Crowds “ ?



Cheers !!




“Regardless of what we believe about the motivations for individual behavior , once we become part of a group , we cannot be sure what to expect . “ by Philip Ball in his book “ Critical Mass “






Some of the pictures I like the most in illustrating the “ Madness of Crowd “ :











Comments

  1. Good one.
    I would neither categorize Trump's election as 'wisdom' nor 'crowds'. The majority of the US people, who bothered to vote, voted for Clinton. Actually less than 20% of Americans voted for him. But 100% of its people have to live with that outcome for at least four years.
    Is that how a democracy should work?

    And in regards to DOW 20,000, it is just an index number without much fundamental meaning. Valuations like P/E or PEG are meaningful for comparing current with the past.
    Having said that merely being part of a group always makes us less inclined to ask the relevant questions. Yes, being part of the herd is fun while it lasts, but it's seldom lucrative for very long, and it's impossible to predict when the herd will change its 'mind.'
    If I want to make more money than other people, I can't invest like other people, right?

    ReplyDelete
    Replies
    1. Hi Andy,
      Yah! The College Electoral system seems doesn't work here ,,,at least for majority democratic where less became president ,,, as for Dow 20k ,,,yup,, valuation matter than the figure ,,,as you said,, sometime ,,one need to be " contrarian " in order to win the market,,, :-)
      Cheers !!

      Delete
  2. Hi STE,

    of the 3 books you mentioned, which book will be a must read? :)

    thank you
    Jovan

    ReplyDelete
    Replies
    1. Hi jovan,
      Each book have their own story and strength and serve different purpose ,,,but if you are interest in " financial market history " ,, and learn from the pass market mistake ...the " Extraordinary Popular Delusion and Madness.." will be better ..." The Crowd " might be too classic as there is new research in "psychology " field appeared with new evidence... I am having this for collection of some " classic book "..
      Cheers ! :-)

      Delete

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