Edward Chancellor
The Delusions of Crowds: Why People Go Mad in Groups by William J. Bernstein Boom and Bust: A Global History of Financial Bubbles by William Quinn and John D. Turner
The Delusions of Crowds:
Why People Go Mad in Groups by William J. Bernstein.
Atlantic Monthly, 482 pp., $35.00
Boom and Bust:
A Global History of
Financial Bubbles by William Quinn and John D. Turner. Cambridge University Press,
288 pp., $24.95
We delight in the folly of others. As Charles Mackay wrote in Extraordinary Popular Delusions and the Madness of Crowds, “Is it a dull or uninstructive picture to see a whole people shaking suddenly off the trammels of reason, and running wild after a golden vision, refusing obstinately to believe that it is not real, till, like a deluded hind running after an ignis fatuus, they are plunged into a quagmire?” Mackay’s book, first published in 1841 in three volumes, covers an eccentric miscellany of popular delusions, from the witch mania of the sixteenth and seventeenth centuries to alchemists, magnetizers, slow poisoners, and the “influence of politics and religion on the hair and beard.” The book’s opening three chapters— which describe the Tulip Mania of 1636–1637, the “money mania” of John Law’s Mississippi Scheme of 1719– 1720, and the South Sea Bubble (also of 1720)—comprise the first popular account of speculative manias. Mackay, who earned his living as a poet, songwriter, and journalist, wasn’t a rigorous historian. His narrative is strewn with outlandish legends, such as the story of a sailor who, during the Tulip Mania, consumed a rare tulip bulb whose cost “might have sumptuously feasted the Prince of Orange and the whole court of the Stadtholder,” mistaking it for an onion. Though Mackay can still be read for pleasure and instruction, since 1841 there have been many more such manias. William Bernstein’s The Delusions of Crowds: Why People Go Mad in Groups, whose title is inspired by the earlier work, follows Mackay’s example by mixing tales of well-known speculative manias with accounts of religious awakenings, from the one begun by the Cistercian abbot Joachim of Fiore in the twelfth century to the rise and fall of the Islamic State. Bernstein, a trained neurologist and the author of several investment books, is particularly well suited to the task of updating Mackay, and his Delusions of Crowds is a worthy supplement to the original. Yet more accurate historical accounts of speculative manias and advances in the psychology of decision-making have failed to produce any noticeable improvement in financial behavior. On the contrary, over the past quarter-century, we have witnessed a succession of speculative bubbles, from dot-com stocks to the current craze for new technologies such as electric vehicles and cryptocurrencies. In place of Mackay’s intuitive insights into crowd madness, Bernstein draws on research in the field of behavioral psychology to distinguish between rational and irrational economic behavior. Under certain conditions, groups of people can make amazingly accurate judgments. For example, the statistician Francis Galton, a cousin of Charles Darwin, discovered that attendees at an English rural fair in 1906 who competed for a prize to guess the weight of an ox came up with a median estimate that was very close to the animal’s actual weight. Bernstein, drawing on James Surowiecki’s The Wisdom of Crowds (2004), describes what’s needed for a crowd to give accurate predictions or estimates: it should display “independent individual analysis, diversity of individual experience and expertise, and an effective method for individuals to aggregate their opinions.” Errors appear when individuals become overly influenced by what others think. “The more a group interacts,” Bernstein writes,
the more it behaves like a real crowd, and the less accurate its assessments become . . . . As put most succinctly by Friedrich Nietzsche, “Madness is rare in the individual—but with groups, parties, peoples, and ages it is the rule.” Mackay also recognized this; perhaps the most famous line in Extraordinary Popular Delusions is “Men, it is said, think in herds; it will be seen that they go mad in herds, while they only recover their senses more slowly, and one by one.”
Imitative behavior was a successful adaptation for early Homo sapiens— if one of our ancestors was seen fleeing from some unspecified danger, it probably made sense to run, too, without asking many questions. But in the complex modern world, imitation can amplify maladaptive behavior, allowing delusional beliefs to take hold. This problem is exacerbated by another innate tendency: our susceptibility to engaging stories, especially ones that transport people from their immediate surroundings and isolate them from the facts of the real world.
Manias are diseases of the mind. Popular delusions occur when appealing but baseless stories spread contagiously from one person to another. Some ideas are more virulent than others: people have been found to react most enthusiastically to narratives of fear. “The human preference for bad news,” Bernstein writes, “is so widespread that ‘bad is stronger than good’ has become one of the basic precepts of experimental psychology.”
New technologies have played into this natural preference. It is no coincidence that the witch mania began only decades after Johannes Gutenberg’s invention of the movable-type printing press. The Malleus Maleficarum (The Hammer of Witches), the first printed encyclopedia of demonology, appeared in 1486; as Hugh Trevor-Roper wrote, this book, compiled by two Dominican inquisitors, “advertised to all Europe both the new epidemic of witchcraft and the authority which had been given to them to suppress it.” In his chapter on the witch mania, Mackay describes how “terror seized upon the nations; no man thought himself secure, either in his person or possessions, from the machinations of the devil and his agents.” Across Europe and later in North America, people believed that the earth was swarming with millions of demons, which, like miasma, couldn’t be seen, and multiplied until the air was supposedly filled with them. Later religious manias described by Bernstein, such as the Anabaptist rebellion in Münster in the mid-1530s and episodes of religious revivalism in Britain and the United States in the eighteenth and nineteenth centuries, were likewise spread by the printed word. More recently, the advent of the Internet enabled the Islamic State to distribute its material, including press releases of the exploits of the “MartyrdomSeekers-Brigade” and videos depicting attacks on “crusader” troops. The
Islamic State’s slick social media campaign attracted converts from far and wide. As Bernstein writes, they discovered that apocalypse sells, and the bloodier the better.
Apocalypse sells, but so does greed, whose appeal, according to Bernstein, is a close second to that of fear. And as with religious manias, manias of financial speculation have frequently coincided with advances in communications technology. The earliest stock market boom occurred in London’s Exchange Alley in the 1690s, at a time when newspapers were deregulated and lists of share prices were first published in trade publications. The advent of steam railways and the electric telegraph in the nineteenth century provided both objects of speculation and means for more rapidly spreading speculative hype. The same was true of radio and telephony in the 1920s. Likewise, the arrival of the Internet in the 1990s served as both the medium of speculation and its object. In Irrational Exuberance (third edition, 2015), the Yale economist Robert Shiller writes that at the time
we were witnessing another explosion of technological innovations that facilitate interpersonal communication, consisting of e-mail and chat rooms . . . . These new and effective media for interactive (if not face-to-face) communication may have the effect of expanding yet again the interpersonal contagion of ideas.
Yet speculative manias aren’t spontaneous, self-forming social phenomena. More often than not, they have a guiding hand. Bernstein claims that bubbles consist of “four Ps”: promoters, public, politicians, and the press. Promoters— such as John Law in 1720; George Hudson, Britain’s “Railway King,” during