Sunday , 19 May 2024

"The Crowd: A Study of the Popular Mind" – Understanding Why You Should Be a Market Agnostic (+2K Views)

Why is it that otherwise rational people take on a herd mentality when investing and seek the comfort of knowing that hundreds of thousands of like-minded individuals think as a group and share their biases and perspective? Is it because the lonely path of iconoclastic thinking and contrary investing may yield better results but is also, well, lonelier? To be wrong when all others are right, even if that latter path yields them little or no return, is to subject oneself to the derision of the social unit. To be right when all others are wrong, even if that former path is wildly profitable, is to subject oneself to the envy and resentment of the social unit. It takes a strong individual to be an individual. Words: 837

Lorimer Wilson, editor of, provides below further reformatted and edited [..] excerpts from Joseph Shaefer’s ( original review* for the sake of clarity and brevity to ensure a fast and easy read. Shaefer goes on to say:

I believe books can teach us about human nature, investing, and wealth and risk management and make us more relaxed, more confident and better investors… and as Gustave Le Bon wrote in the introduction to his little gem, ‘The Crowd: A Study of the Popular Mind’ back in 1896, “The substitution of the unconscious action of crowds for the conscious activity of individuals is one of the principal characteristics of the present age” and no truer words were ever spoken about the psychology of how people tend to invest in this “present age”!

“The Crowd” was not a book written about the stock market. Au contraire! It was written to try to understand group psychology, whether the group was a criminal organization, an electorate, a jury or a parliament. Nevertheless, understanding the group dynamics of each of those is a good practice ground for understanding the emotions and actions of one camp or another when debating a stock, an industry or a sector and “The Crowd” offers, via these other avenues, unique insights into what makes people do the things they do from within the warm incubator of like-minded individuals.

At its lowest level of over-simplification, Le Bon’s thesis is that the behavior of crowds is based on sentiment and emotion rather than intellect and research. That may seem rather obvious today since other social scientists have been agreeing with and building upon his work for over a century – but how many of us invest accordingly? Do we seek to understand the hope, fear, greed, mistakes and misinterpretations of the crowd or do we seek to find “facts” for why the market rises or falls on a given day, week, month or year?

Most of us want to know “why” the market declined today. We are satisfied when we hear the evening news: Oh, it was because Company X declared lower sales or because Company G was sued by the SEC or because Greece is not going to get a full bailout from Germany. Ah, we say – now it makes sense. Of course it went down.

Le Bon would no doubt say that it declined because there were more sellers than buyers so the price began moving downward to attract more buyers. It declined because more people became nervous, or got a wild hair from something they overheard at the giant media water cooler, or received a message on their dentures from alien life forms. It is sentiment that moves crowds, not reason – and being a member of a crowd causes one to behave differently from the way one would behave as an individual.

Le Bon saw crowds as a psychological phenomenon rather than a physical one. Individuals can form a crowd having never met or come together simply by having a common cause. This type of influence can easily be found in groups such as members of a particular occupation or calling, religious sects or even entire religions, sports teams and their fans, and so on. Then there are the crowds of advocates for the bullish camp and the bearish camp in any market.

Le Bon maintained that:
1. a crowd effectively has a mind of its own
2. individual behavior is altered by membership in the crowd – often to the point of subjugating misgivings or original thinking to the will of the crowd.

The above two concepts suggest that market agnosticism, while a very difficult path to tread, seems to offer the best hope of long-term success and, as such I heartily recommend this book to you.

* (Joseph Shaefer is author of the investment primer ‘Bringing Home the Gold’ and editor of Investor’s Edge®.)