The Madness of Crowds.

February 13, 2014

Heard of the Salem Witch Hunt? What about the Satanic-mania of the 1980s?
In the 1980s, amidst the backdrop of Ronald Reagan, Pac Man and Michael Jackson, America witnessed a virulent moral panic involving alleged satanic ritualistic abuse against children.
Ever wonder how a witch hunt begins?
Seemingly random incidents were linked by organizations on the lookout for bizarre societal behaviors. Soon, concerned citizens spoke in hushed tones of apparent satanic influences.
Suddenly, word spread of a conspiracy involving the dark arts and the nation's traditional child care system. Rumors of child abuse gave way to allegations against traditional caregivers: Teachers. Preschools. Nursery schools. Daycare centers. Babysitters.
Soon, the fires of controversy burned across much of the United States. Criminal investigations were underway. Talk shows, parental and religious organizations fanned the flames. Told of a worldwide conspiracy pitting the forces of evil against American children.
A modern-day witch hunt. In 1980s America.
Eventually, investigations produced nothing. No conspiracy. No slaughter of innocents. No crimes involving devil worship and children.
Soon enough, the matter dissipated into the ethosphere of yesterday's news. Though, not in time to prevent the destruction of individual reputations and careers.
A modern-era witch hunt involving demons and children. Allegations of a conspiracy to carry out ritualistic abuse under the watchful eyes of a modern society. Innocent lives, destroyed. 322 years following the Witch Trials of Salem, Massachusetts.
Just another extraordinary popular delusion spawned by the madness of crowds.
For the attentive, the event reaffirmed valuable lessons concerning the lethal potential of groupthink. That fact that an idea can evolve into mass hysteria. Can lead to the depths of darkness. Long before the truth comes to light.
Conformity. Groupthink. Convention. Herd mentality. Regardless of the moniker, the attributes of interdependent thinking can poison a free society. Stifle creativity. Stunt critical thought. Incite enthusiasm for the most demented of causes and crusades.
William Safire discussed these traits in his "On Language" column in 2004. Safire referenced William H. Whyte Jr.'s creation of the term "groupthink" in a 1952 Fortune magazine article. Whyte, the author of The Organization Man, lamented the "rationalized conformity" which, he reasoned, had become the "national philosophy."
By example, Whyte bemoaned the orthodoxy that had become justified through conventions deemed efficient, acceptable and good.
Two decades later, Irving Janis wrote Victims of Groupthink, in which he pondered how groups create pressures so that "the members' striving for unanimity overcome their motivation to realistically appraise alternative courses of action."
History reveals that, as groupthink and conformity take hold, so develops a vicious circle: the more cohesion, the more pressure toward "rationalized conformity." With more conformity comes more cohesion. Outsiders, and their ideas, are shunned. Everybody adheres to the same chorus. Unique perspectives and original thoughts are crushed. Individualism is deferred for the good of the whole. Before long, homogenized means of thinking bring the most ill-conceived ideas rapid and unanimous acceptance.
Voila. A witch hunt. In 1980s America. Yet, should not our open-minded, democratic society be an antidote for such madness?
Or could it be, in fact, the opposite.
Our societal paradigm, with its propensity for labels, brands and memberships, seems hell bent on fomenting groupthink at the juncture of every decision tree.
This begs the philosophical question: is society smarter in sum, or in its individual parts?
Henry David Thoreau lamented upon the issue, saying "The mass never comes up to the standard of its best member, but on the contrary degrades itself to a level with the lowest."
Of course, Thoreau was a rabid individualist. What about really effective groups. Like our democratic government?
As a democracy, the United States has long prided itself on the ability to collectively discern its future path. As well as its most effective political leadership.
Yet, critics argue that a democratic means of government simply enables the crowd to cast votes for those promising the most benefit to the widest swaths of the electorate. Regardless of the substance behind such promises.
Gustave Le Bon was such a critic.
In 1895, Le Bon published his polemical classic The Crowd: A Study of the Popular Mind. Appalled by the rise of democracy in Western society, Le Bon was equally dismayed by the idea that ordinary people had come to wield such political and cultural power.
Accepting that Le Bon was likely a pompous, aristocratic windbag, his argument merits analysis.
A crowd, he explained, is more than the sum of its members. In fact, it is an independent organism possessing an identity and will of its own. As such, a crowd will often act in ways that no individual member of the crowd intended. And when it does act, it invariably acts foolishly.
Le Bon felt that a crowd could be cowardly, or cruel, but could never be smart. As crowds can never accomplish anything demanding a high degree of focus, direction or intelligence, crowds are always intellectually inferior to the individual.
Le Bon's idea of the crowd encompassed the obvious examples of collective savagery, like rioters, lynch mobs and the Nazi party. But also included just about any group of decision makers.
How could a young son of Dachau join the German military in 1939 and so readily accept his responsibilities at the camp to which he was assigned?
Consider the words of Friedrich Nietzsche, of whom Hitler was a devotee, who wrote, "Madness is the exception in individuals but the rule in groups."
Nietzsche believed that as individuals, man possess the opportunity for greatness. He also felt, however, that collective reasoning -- that is, groupthink -- had the propensity to dull man's senses. Stifle man's aptitude for achievement. Lead him to places he may not have individually strode.
Of course, modern scholars, naturalists and biologist will opine on the power of groupthink throughout the natural world. But, there too we find refutations to mainstream thought.
Take ant colonies. Long held out as mother nature's supreme example of the power of collective action and achievement, recent studies reveal otherwise.
Takao Sasaki and Stephen Pratt from Arizona State University found one such example in their study of house-hunting Temnothorax ants.
While the researches had previously believed that the colony was collectively more capable of choosing the best living locations, their findings showed that this only happens if the options are similar. It one potential nest site is clearly better, individual ants tended to make better decisions than did the colony. Read more here.
If on occasion, we have misread ants, then what about ourselves?
This underscores an important theme for investors. Not to mention decision makers of all disciplines.
That is, if ants, in their non-emotional, performance-based hierarchical systems can commit collective errors in which the crowd's wisdom devolves into foolishness, then what of homo sapiens? What of our emotionally charged, fear- and greed-based means of decision making? To what types of errors might we susceptible?
Well, when it comes to groupthink, let history be your guide.
Financial manias. Racism. Anti-Semitism. Misogyny. Xenophobia. Nationalism. War. Fanaticism. Fundamentalism. And witch hunts. 322 years apart. Just to name a few.
In the name of race, nationality and religion, human beings have begun an innumerable variety of ill-conceived crusades intended to benefit whatever collective from which it may have originated.
We continue to elect and re-elect politicians who, aside from a talent for personal enrichment, have failed in providing any other attributes proven to elevate the plight of their constituents. Yet, any charismatic individual with a quick tongue, deep pockets and moxy can step into national office and set the agenda. And our opinions.
Suddenly, one understands how investors so quickly buy into any sales pitch. Any potential moon shot. Any get-rich-today scheme. Regardless of rationale, logic or methodology.
History remains littered with the scarred remnants of groupthink. The South-Sea Bubble. Tulip Mania. The Crusades. Witch Hunts. Fascism. Nazism. Totalitarianism. Fundamentalism. The Cabbage Patch Dolls. Boy Bands. Tech Bubble. The Housing Bubble. Washington D.C. and most of its inhabitants.
We stumble from one collective mania to the next. Driven by fear and greed. Catalyzed by the herd mentality. Driven by a hunger for ruin that prevents us from seeing the forest for the trees. Until its burning around us.
"Men, it has been well said, think in herds," wrote Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds. It will be seen that they go mad in herds, while they only recover their senses slowly and one by one."
So it goes with investors. Afire with the fever of each passing mania. Hungrily reaching for wisps of smoke that barely exist. Or running, en masse, from the illusory demons of our financial demise. Demons that exist only in our collective psyches. Manufactured by our deepest insecurities. Magnified by the popular media.
So long as investors tune into the ill-conceived collective narrative, they will continue to act like anxious cows, flicking their nervous heads to and fro. Running from imaginary predators. Until, chasing the herd, they find themselves singularly vulnerable. Incapable of acting alone. Fixated on the approaching headlights.
Wake up, America.

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