The Delusions of Crowds: Why People Go Mad in Groups
William J. Bernstein, 2021
Why does a crowd guess the weight of an ox to within one percent, and then snap up shares that are worth nothing? William Bernstein traces five centuries of mass madness, from besieged Münster to the stock market crash of 1929 and the Islamic State. He shows that money bubbles and the expectation of the end of the world grow from the same root, and teaches you to notice when the crowd starts to sweep you along too.
Who it is for
For anyone who has ever bought something only because everyone else was buying it. And for anyone curious why smart people believe in stock market bubbles and in the coming end of the world.
There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.
The expert on madness who missed his own
In 1841 the Scottish journalist Charles Mackay was 27 years old, and he published a book about the mass madness of the past: about stock market fever and about belief in the coming end of the world. A few years later England was gripped by railway fever. From 1843 to 1848 the length of English railways grew from 2,000 to 5,000 miles.
At the time Mackay was editing a newspaper in Glasgow. In the autumn of 1845 he wrote in it that the railway craze had nothing in common with the old swindles, since its foundation was broad and solid. In the second edition of his book he mentioned this mania only in a short footnote.
The financial analyst and historian William Bernstein draws a conclusion from this case: stupidity is not the problem. In his view, people by nature imitate others, love gripping stories and seek high status. And money manias and the expectation of the end of the world, he argues, grow from the same root: the hope of improving your life, in this world or the next.
Ahead of us are an ox and a jar of jelly beans, sugar labeled “cyanide,” a railway king and a preacher who set a date for the end of the world. Let’s start with the ox.
An ox, a jar of jelly beans and answers out loud
In the autumn of 1906, at a livestock fair in Plymouth, the scientist Francis Galton, a cousin of Charles Darwin, ran an experiment. About 800 people bought sixpenny tickets and tried to guess how much an ox would weigh once it was butchered. When all the guesses were lined up in order, the one in the middle came to 1,207 pounds. The ox weighed 1,198. The crowd was off by less than one percent.
An important detail: the participants wrote their answers on cards one by one and did not confer, since each of them wanted to win the prize alone.
Later the financier Joel Greenblatt repeated the experiment with schoolchildren from Harlem. The jar held 1,776 jelly beans. When the children wrote down their guesses in silence, the average came to 1,771. When each of them said a number out loud, the average dropped to 850.
Bernstein’s conclusion is this: the more closely people communicate, the worse they judge. A group is smart as long as everyone thinks for themselves. It is like a choir in which each singer sings their own part from the score. Once the singers start adjusting to their neighbors, the whole choir slides onto one false note.
Hence a simple habit. Before you read other people’s forecasts, reviews and comments, write down your own estimate.
About the author
William Bernstein is an American neurologist who became a financial analyst and the author of books on the history of economics and investing.
All books by this author: William J. Bernstein
Terms from the book
- Galton
- Hudson
- Greenblatt
- nucleus accumbens
- Miller
- confirmation bias
- bubble
- Fisher
- Islamic State
- Bayes
- Mackay: Charles Mackay (1814–1889), a Scottish poet and journalist. In 1841 he published a book about popular delusions and the madness of crowds that is still in print today.
- Kindleberger: Charles Kindleberger (1910–2003), an American economic historian, author of a well-known book on financial manias, panics and crashes.
- Solomon Asch: An American psychologist (1907–1996). In the 1950s he ran experiments that showed how group pressure makes a person agree with a wrong answer.
- Paul Rozin: An American psychologist at the University of Pennsylvania who studies disgust and magical thinking.
- Melanie Green: An American psychologist. Together with Timothy Brock she studied how getting absorbed in a story changes a reader’s views.
- Timothy Brock: An American psychologist at Ohio State University who studied the power of narrative together with Melanie Green.
- Joachim of Fiore: An Italian monk and abbot of the twelfth century from Calabria. He divided history into three ages and waited for the third, golden one to arrive.
- Anabaptists: A Protestant movement of the sixteenth century. Its followers baptized only adults, not infants.
- Münster: A city in northwestern Germany. In 1534–1535 it was ruled by Anabaptists who were waiting for the end of the world.
- Jan Bockelson: Also known as John of Leiden. A leader of the Anabaptists who became king of Münster. Executed in 1536.
- Ponzi scheme: A fraud in which old investors are paid with new investors’ money. Named after the swindler Charles Ponzi, who lived in the twentieth century.
- Himes: Joshua Himes, a Boston pastor. He turned Miller’s preaching into a mass movement with newspapers and tent meetings.
- Festinger: Leon Festinger (1919–1989), an American social psychologist who coined the term “cognitive dissonance.”
- Dorothy Martin: An American woman who in 1954 predicted a deadly flood and rescue by flying saucer. Festinger observed her group.
- cognitive dissonance: The unpleasant feeling when a person’s beliefs clash with the facts or with each other.
- Wason: Peter Wason (1924–2003), a British psychologist, author of the experiment with the number triple 2, 4, 6.
- Minsky: Hyman Minsky (1919–1996), an American economist. He believed that calm in the market itself pushes people toward ever riskier debt.
- RCA: Radio Corporation of America, an American radio company founded in 1919. In the 1920s it was the darling of the stock market.
- Raskob: John Raskob (1879–1950), the chief financial officer of DuPont and General Motors. In 1928 he became chairman of the Democratic National Committee.
- Darby: John Nelson Darby (1800–1882), an Anglo-Irish clergyman, founder of the Plymouth Brethren movement and of the teaching about dispensations.
- dispensationalism: A Protestant teaching that divides history into ages and awaits the rapture of believers into heaven, seven years of tribulation and the return of Christ.
- Armageddon: The place of the last battle between good and evil, mentioned in the Revelation of John. The name is linked to the ancient city of Megiddo.
- Lindsey: Hal Lindsey, an American preacher, a graduate of Dallas Theological Seminary, author of The Late Great Planet Earth, a book about the coming end of the world.
- Dabiq: A small town in northwestern Syria. According to one Islamic tradition, a battle before the end of the world will take place there. The Islamic State’s propaganda magazine had the same name.
- Manichean: A word for a view that divides the world into pure good and pure evil. It comes from the ancient teaching of the Persian Mani.
All terms
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