The Foolishness of Crowds

Have you ever cheered with a really big crowd?

Photo: Pexels. Source: Pixabay. License.

The cheering and excitement take on a life of their own. We get swept up in waves of emotion and excitement, carried along by the power of thousands and thousands of people just like us, rooting – and dreading – the same things. There’s something primal, elemental about it.

People are tribal. We’ve developed group cohesion strategies in order to survive. Social media, news outlets, politicians, marketers all use this tendency to create brands and loyalty and – perhaps – economic value. And we can go along with it, especially when it’s a bit of harmless entertainment. Why do we care about our sports teams? What do they exactly do for us? After “Deflategate,” 70% of the country thought Tom Brady had cheated, but 70% of New Englanders believed that he didn’t. People get into serious, life-changing conflicts because of our tribal loyalties.

The French thinker Gustav Le Bon studied crowd dynamics a hundred years ago. He theorized that a large group can become its own entity, forming a collective unconsciousness in which an individual is a grain of sand amid other grains of sand, stirred and blown about by the wind. People become malleable and suggestable, and strong voices shape and mold the crowd’s thinking. Demagogues in the early 20th century are known to have studied Le Bon’s work.

This can happen to markets. Over the past 20 years we’ve seen bubbles in tech stocks and housing prices, and we’ve seen depressive valuations in financial companies and energy firms. Five years ago higher interest rates were inevitable. Now lower rates are expected. The financial cycle turns in time to its own clock.

Someone once noted that the madness is rare in individuals, but in groups, states, and societies it’s the norm. We can choose: to be individuals or to be swept along with the mob. So consider Mark Twain’s advice: “Whenever you find yourself on the side of the majority, it’s time to pause and reflect.”

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2019-09-10T06:47:58-04:00September 10th, 2019|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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