The most influential book I’ve ever read on social psychology was, unquestionably, The Crowd: A study of the popular mind by Frenchmen Gustave Le Bon in 1895. Some 30 years ago, while browsing through a used bookstore in Manhattan, I happened across a musty long out-of-print paperback edition. Today you can download the utterly remarkable 143-page Kindle version at no cost from Amazon, an exception to the rule that there is no free lunch.

To be sure, Le Bon’s theories are controversial. On July 27, 2016, The Atlantic published “Donald Trump and the Myth of Mobocracy: How the dubious ideas of a 19th-century Frenchman reverberate in 2016.” Zaretsky, the writer, nuances Le Bon’s thought with recent reevaluations. Still, Le Bon goes a long way in helping to understand the transformative nature of today’s digitally and therefore instantaneously linked, globally dispersed, crowds that make up the world’s capital markets.

First, though, let’s binge on the theoretical. Le Bon keynotes The Crowd with this provocative statement: “The most striking peculiarity presented psychologically by a crowd is the following: “Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think, and act were he in a state of isolation.” Le Bon further observed that we are likely to function at a lower level—intellectually, morally, and emotionally as a result of submission to the will of the crowd. “Men the most unlike in the matter of their intelligence possess instincts, passions, and feelings that are very similar. From the intellectual point of view an abyss may exist between a great mathematician and his bootmaker, but from the point of view of character the difference is most often slight or nonexistent.” Membership in the crowd brings an egalitarian leveling to the ignorant and educated alike, largely because of the substitution of the unconscious behavior of crowds for the conscious activity of individuals in isolation. Le Bon also described crowds as emotional and says that, when in them, the individual begins to feel and express the emotions of a “primitive being.”

Individuals often become “lost” in crowds and perform acts they wouldn’t perform were they alone. In addition to having a collective mind, a crowd is irrational. Moreover, it is worth repeating that the process of capitulation downgrades an individual’s capability for intellectual processing to the diminished level of the crowd, effectively the lowest common denominator. The crowd is a mighty monster—usually with a pea brain!

According to Le Bon, three mechanisms are responsible for creating this monster. First, because the individual is anonymous, he or she loses the sense of individual responsibility and thus participates in acts in which he or she would not normally engage. Second, the process known as contagion leads to the reduction of an individual’s inhibitions, making it acceptable to behave as a role model behaves. And third, people become more susceptible to suggestion in crowds; the crowd effectively hypnotizes the individual, who then follows the suggestions of other members or the crowd’s leader. Behaviors become impulsive, emotional, and difficult to terminate. Simplicity of suggestion is mandatory and paves the way for exaggeration of the sentiments; the throngs are burdened neither by doubt nor uncertainty (at least till later, at which point some members of the crowd begin to wonder “what happened”). The process known by contemporary social scientists as “deindividualization” takes place, partly, because of the aforementioned group anonymity and a heightened state of arousal. These conditions lead individuals to become submerged in the group, losing their own sense of identity. When this loss occurs, people no longer feel responsible for their behavior; their attention is drawn to the group and behavior becomes regulated by fleeting cues in the immediate situation.

Le Bon, the Crowd, and Markets

What Le Bon describes in theory was masterfully captured in episode after episode of the 410-page classic, Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay. A second almost free lunch, the Kindle version is $0.99. If are unfamiliar with the 1635 story of Dutch investment of 100,000 florins (roughly equivalent to $14 million today) in 42 tulip bulbs whose intrinsic worth was little more than zero, Mackay’s book is a must –thoroughly stimulating and engaging – read. John Law and the famous Mississippi scheme in France in the early 1700s is a fascinating example of one man who understood the philosophy and true principles of credit better than any other of his day. Both the deceiver and the deceived, he laid the groundwork for the financial chaos that engulfed France. Admittedly requiring a little imagination, the parallels with the day jump off the pages. In a recent post, Warren Buffett’s candid observation resonated with me: “very, very few people could appreciate the bubble [leading up to the financial crisis], which he called a “mass delusion” shared by “300 million Americans.”

As Holland’s Tulipmania made clear, a crowd thinks in images. It accepts as real the images evoked in its collective mind, though these images generally have only a very distant connection to the observed fact. The collective observations of the crowd frequently are erroneous and most often merely represent the illusions of an individual who, by the process of contagion, has influenced his fellows. Alan Greenspan and his successors were infected by and thus became carriers of the highly contagious delusion that F. A. Hayek described as “The Pretense of Power” in his 1974 Nobel Prize acceptance speech.

Le Bon’s contribution as a theorist in the nascent field of social psychology did not go unrecognized by the nefarious social masterminds and manipulators of the early 20th century, men far more malicious than the governors who preside over the Federal Reserve System. Lenin, Hitler, and Mussolini were all quick to recognize his genius, relying heavily on Le Bon’s insights in developing their propaganda campaigns and personal leadership styles. The Frenchman, whose background is aptly described in The Atlantic article, would have been appalled.

It was Edward Bernays (1891–1995), a nephew of Sigmund Freud, who noted the commercial if not the political potential of incepting and harnessing the collective mind. As an immigrant pioneer in the U.S. in the field of public relations (a phrase he coined because it connoted a kinder image than “propaganda,” which was then linked to the Third Reich), Bernays observed:  “If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without theirs knowing about it?”  He called this scientific technique of opinion molding the “engineering of consent”; it has been successfully employed by corporations and politicians to manage public opinion ever since.[1]

Ironically, it was Paul Mazer of Lehman Brothers (circa the 1930s), with Bernays at his right hand, who uttered the words that synthesized the profound reorientation in consumerism in the decades that followed.  “We must shift America from a ‘needs’ to a ‘desires’ culture; people must be trained to desire, to want new things even before the old has been completely consumed.  We must shape a new mentality in America; man’s desires must overshadow his needs.”  Lehman’s demise, three-quarters of a century later, resulted because it recklessly financed those desires.

To be sure, we’re quick to acknowledge that separation from the crowd does not protect us from thinking and acting quite stupidly. However, as part of a crowd, we have little or no opportunity to be the best we can be. We need not be intimidated by crowds if we only understand the transformation that takes place in the functioning of the individuals that compose them. Indeed, crowds have their rightful place in history—and they are capable of incredibly heroic deeds, as the young Chinese students at Tiananmen Square demonstrated. Investing, however, is a cerebral endeavor, dependent on intellect and not force, reason and not impulse, self-control and not high emotion. Mackay’s classic indirectly points out the importance of, and profound difficulty in, remaining detached from the crowd. “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, one by one.”

[1] See Theodore White’s book, “The Making of the President,” about John Kennedy in 1960.

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