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The Delusions of Crowds: Book Review

The Delusions of Crowds: Why People Go Mad in Groups, William J. Bernstein (2021). Lot of examples. I’m interested in the psychological reasons for the behaviors that result. Bernstein spends a lot of time on Armageddon (end-time) scenarios, which I’m less interested in.

He starts with Charles Mackay who wrote about delusions in 1841, including the Dutch tulip mania, the Southsea Bubble, Mississippi Bubble, and end-times. Greed and fear are psychological mechanisms associated with the limbic system, while people seek high payoffs that rarely happen, like lotteries [called risk seeking by economists]. Certain parts of the limbic system fire for rewards (particularly anticipation), others for fear or disgust. People seem to prefer rationalization over rationality. Charles Kindleberger: “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich” (p. 11).

One type of delusion is the financial bubble, starting with speculation, outlandish forecasts, and so on. Another is religious manias, like biblical prophecy, the Crusades, and witches. Apocalyptic end-time groups are still with us and possibly growing. The Bible has Ezekiel, Daniel, and Revelations, blueprints for bloody end-times. The Islamic State attracted radical believers in part with end-time narratives.

Humans like narratives (story telling). [I’m an accountant and therefore like numbers and analytical perspectives; apparently, I need to work on my story telling. Data is not that convincing for most people.]

Evolutionary psychologists note that people adapt to new climates and situations including new skills and technology they had to invent, literally around the world, general purpose skills including trial and error. [Note that birds adapt and live around the world but with about 12,000 species rather than the single human species.] People are good at imitating. However, that also works for delusional beliefs: imitating adaptive versus maladaptive behaviors. One problem is people are more responsive to stories than facts. A compelling story erodes critical thinking skills.

Bernstein believes most religious delusionists were true believers rather than con men. Protestants developed “dispensational premillennialism” (dispensationalism) about 150 years ago, end time narratives that are convincing to some people.

“Many of the world’s theologies tend to view the others’ belief systems as heretical” (p. 26). Freud noted the “narcissism of small differences. “A delusion shared by hundreds of people is called a cult, whereas one shared by millions is called a religion.

Then there was the wisdom of crowds beginning with Francis Galton who discovered that a large number of people guessing can be accurate as a group (his example was an ox-weighing contest), summarized by James Surowiecki’s book. Another experiment used jellybeans. When people interact, accuracy goes down. Nietzsche: “Madness is rare in the individual—but with groups, parties, peoples, and ages it is the rule” (p. 23). [Note that Nietzsche went nuts and was institutionalized.] Philip Tetlock examined forecast accuracy and found better forecasters considered alternatives.

Chapter 1: Joachim’s Children. Joachim of Fiore was a 12th century Cistercian abbot, who unfortunately noted the end-time narratives in Ezekiel, Daniel, and Revelations. Hesiod on his 700 BC farm in Greece: “bad in winter, sultry in summer, and good at no time” (p. 31). Ezekiel was a prophet from the Babylonian Captivity with destructive predictions for the return of the Davidic kingdom. Daniel also was part of the Babylonian Captivity in the employ of Nebuchadnezzar, including the bit with the lions’ den. Revelations was written about 95 AD by John, with destruction and the saving of 144,000, 12,000 from each tribe. These were common world ending in predictions that spare the righteous. Apparently about 35% of Americans believe the Bible is the literal word of God.

End-time prophecies are compelling stories, but have a zero track record [plus they assume never taking a science course]. Psychologists claim people are cognitive misers and avoid analysis in favor of heuristics (like a great story). Psychologists Keith Stanovich and Richard West described System 1 (fast-moving emotional responses) and System 2 (slower conscious reasoning). System I was important when hunting say a mammoth. Fictional data corrodes people’s grasp of simple facts. People have trouble separating fact and fiction. Story telling transports people, and they are less likely to doubt, question, or disbelieve. Less analytical people are more likely to be transported. To convince someone target their System 1 with narrative. The thalami at the top of the brain stem connects directly with System 1. System 2 required the temporal lobe. Music bypasses System 2 and is persuasive. Humans prefer bad news to good news; fake news seems more persuasive. People look for order and regularity even when it does not exist—ergo, story telling.

Chapter 2: Believers and Rogues. Anabaptists rebaptized adults. Ulrich Zwingli established a church in 1519 in Zurich.

Chapter 3: Briefly Rich. John Law ended France’s use of banks. Large trade organizations were established by 1600, including the East India Company. England had no banking system in the Middle Ages. Goldsmiths accumulate gold and exchange it for certificates, basically printing money. They could loan money using these certificates as an early form of banking. A 2:1 ratio (loans to gold) worked, higher did not at the time, leading to goldsmith runs around the 1680s. The Bank of England was established in 1694. Banks supplied leverage which fueled manias.

Law observed Holland’s Bank of Amsterdam and stock exchange. Low money supply strangled European economies. Money according to Law has stability of value, homogeneity, ease of delivery, storability, divisibility, and identification of value. Silver flooded into Europe from Peru and Mexico from mid-16th century. Economies started with barter, then metallic money, then paper money and credit.

France was broke when Louis XIV died in 1715. Law started with a private bank in 1716, issued paper money, and focused on the Mississippi Company, with the company buying up the crown’s debt. The Mississippi role astronomically with shares bopught by subscription with 10% down. Aristocrats torpedoed his system and a run on the bank followed, then inflation and debasement of the livre. The Mississippi did own the Louisiana Territory but this was not a popular destination.

England had a similar bubble with the South Sea’s Company, fueled by elite greed. The Monopoly was nearly worthless. Great wealth from dishonesty. The main culprit, John Blunt, spent little time in prison.

Chapter 4: George Hudson, Capitalist Hero. Psychologist Solomon Asch used lines on paper and demonstrated that subjects got answers wrong if prompted by confederates. People are suggestible to other people and assume their mental processes fail them. People are conformist, some more than others. Watching others get rich is difficult; plus people like to imitate. People have unbalanced states where data contradicts everyday beliefs.

Richard Trevithick turned steam engine sideways and mounted it on a locomotive in 1801. Railroads were the high tech of the age, increasing travel and trade and many lines built, creating bubbles and company failures. Also cost overruns and dubious practices. George Hudson became “Railroad King” with multiple railroad companies. Collapse meant bankruptcies and losses, but also meant greater regulation outlawing the worst practices (which Hudson was good at). The good news was a substantial infrastructure, but unprofitable.

Chapter 5: Miller’s Run. Dorothy Martin, an early devotee of Scientology, claimed to have channeled spirits warning of catastrophe in 1954. Her group was to meet a flying saucer on a specific date. Police brought changes and placed her in psychiatric care. Psychologist Leon Festinger analyzed her case and coined the term “cognitive dissonance” to describe emotionally unpleasant conflict between facts and narrative.

John Winthrop preached the “city upon a hill” in 1620 Bay Colony, expected favor from God.

Martin Gardner: “Few books illustrate so beautifully the ease with which an intelligent man, passionately convinced of a theory, can manipulate his subject matter in such a way as to make it conform to precisely held opinions. … Christopher Hitchens: an odometer for idiots” (p. 180). Confirmation bias, paying attention only to data supporting that belief. The scientific method seeks to disprove hypotheses.

William Miller believed 1843 was the end time, with the righteous going to heaven and wicked destroyed, with help from hell fire and brimstone evangelicals. It came and went: disappointment and fanaticism. “Adventists responded to the massive cognitive dissonance in widely varying ways” (p. 201). The Seventh-day Adventists are mainstream and socially conservative, but still expecting the Second Coming.

Chapter 6: Winston Churchill’s Excellent Adventure in Monetary Policy. “All people are most credulous when they are most happy” (Walter Bagehot). Churchill was made Chancellor of the Exchequer, resuming the gold standard after WWI. The US “bailed” Britain out by lowering interest rates in 1927. The disaster was the stock crash of 1929 and Great Depression. Hyman Minsky described bubbles as needing easy credit and new technologies, like the 1920’s RCA, utilities, airlines. One cause was elastic currencies with banks (including the Federal Reserve) can expand and contract money. Minsky’s instability hypothesis claims that money migrates toward risky borrowers, ultimately resulting in a blowup. Bubbles also required “amnesia” of previous bubbles, and abandoning objective methods for valuing investments.

Tversky and Kahneman demonstrated people have poor statistical intuition (including fellow psychologists) [Samuelson proved the same for economists]. They found systematic analytic errors like the blindness to baseline frequencies. Humans overemphasis dramatic events and the availability and recency heuristics (salience).

Financial innovations proved less productive including brokers’ loans, investment trusts, and holding companies. John Templeton: The four most expensive words in the English language are “this time it’s different” (p. 232).

Chapter 7: Sunshine Charlie Misses the Point. The 1929 crash had “fours ps: the promoters, public, press, and politicians” (p. 237). Samuel Insull worked for Edison and created an electric monopoly around Chicago, creating a utility empire. He layered his companies to control with minority shares using holding companies with considerable leverage, a practice common before 1930s regulations. He sold shares to the public at inflated prices and borrowed millions during the 1929-32 bear market, while his empire went bankrupt. He was indicted but acquitted.

During the 1920s Minski’s bubble requirements were active, including cheap credit, manipulation techniques like stock pools manipulating price, insider trading, political backing, new high tech industries including radio with RCA, and over-optimism. Hoover in 1928: “We in America are nearer to the final triumph over poverty than ever before. The poorhouse is vanishing from among us” (p. 245). He would soon be known for Hoovervilles in the middle of DC and elsewhere. Robert Shiller: “bubbles occur … if the contagion of the fad occurs through price” (p. 246). 1929: financial speculation, overwise sane people turn to speculation, tirades against skeptics, no relationship to standard analysis techniques like using dividends and earnings. Economist Irving Fisher in October 1929: “Stocks have reached what looks like a permanently high plateau” (p. 250).

Sunshine Charlie Mitchell started a small securities dept. at National City Company. The company sold securities in increasingly dodgy firms for substantial fees, including soon-to-go-bust foreign governments. These securities were sold to the public by a large team of salesmen claiming blue-chip qualities. This was ground zero for the crash. Attorney Ferdinand Pecora would lead the Senate’s Committee on Banking and Currency in its investigation. Pecora determined that Mitchell saw nothing ethically challenging in his behavior and just had him explain how he handled his operations. How were executives paid? Based on profits. How much was Mitchell paid? Over a million bucks. Then selling stock to his wife and not pay tax, do stock pool manipulation, and “forgivable loans” to executives. Then Pecora focused on the damage to individual investors (based on letters to the committee), then introduced “bankster.” Mitchell found himself on trial for fraud, then pay back taxes. The law changed after that with two securities acts and setting up the Securities & Exchange Commission and Glass-Steagall.

Chapter 8: Apocalypse Cow. Melody the cow was red, therefore to be ritually sacrificed for the Apocalypse. Polls indicated about a quarter of Americans believe the Bible is the world of God, a quarter believe Jesus returns to earth, and 61% believe Satan exists.

Manichean (founded by Iranian Mani) thinking is the clear black and white separation of the world between good and evil, light versus darkness. Reagan was familiar with it, plus other politicians including Pence. German theologians were the first to backpedal from biblical infallibility and treat the Bible as allegorical. Evangelical colleges favored prophecy over science. Arthur Balfour favored Palestine as a home for Jewish people.

Chapter 9: God’s Sword. The Temple Mount was part of end-time narratives, meaning the creation of Israel meant the end-time was coming. Ezekiel, Daniel, and Revelations expected a savior (messiah) creating a kingdom of God in Jerusalem.

Chapter 10: Entrepreneurs of the Apocalypse. George W. Bush announced military action against Afghanistan in 2001, but his speech was peppered with evangelical buzzwords.

“Confirmation bias does not merely involve actively seeking favorable evidence, no matter how vague, but it also casts a willful blind eye over contrary data” (p. 330). Reagan was a knowledgeable end-timer, meeting with Jerry Falwell (moral majority guy), Jim Bakker, Pat Robertson, and Billy Graham. Fittingly calling the Soviet Union the “Evil Empire.” He knew next to nothing about what was going on in the World.

The secularization hypothesis: as societies become wealthier and better educated, they become less religious. Better general knowledge helps. Richard Hofstadter noted tendency toward conspiracy theories in American politics, in line with the Manichean struggle between good and evil—often based on wacky theologies to demonize others. Experiments were made of in group/out group behavior showing how easy it was to demonize out groups.

Military culture as below Mason-Dixon line with problems of race, sex, and anti-Semitism.

Chapter 11: Dispensation Catastrophes: Potential and Real. Daniel Ellsberg noted that the movie Dr. Strangelove looked like a likely future documentary.

Chapter 12: Rapture Fiction.

Chapter 13: Capitalism’s Philanthropists. Gary Winnick’s Global Crossing laid fiber-optic cable then went belly up. Louis Borders of bookstore fame created a massive plan to deliver groceries to customers, ditto on bankruptcy. Enron started as a staid gas transmission company, then turned into an inflated fraud. [I’ve written a lot about Enron, so I won’t describe much of Enron here.] Key points included idiot investments and the vast use of special purpose entities to camouflage the results.

Chapter 14: Hucksters of the Digital Age. Celebrity analysts were employed by investment banks that sold the IPOs, a clear conflict of interest, like Henry Blodget and Mary Meeker. Analysts not on board could be fired, like John Olson. ERISA established the IRA and defined contribution plans started to replace defined benefit plans. Roger Ailes was great promoting finance shows using people like Geraldo Rivera and Mary Matalin, but got fired over abusive behavior. “Ailes understood his audiences preferred the cotton candy of entertainment to the spinach of information” (p. 450). Investigative reporting stopped because it costs money; instead talk to executives and market strategists—like CNBC and Jim Cramer’s Mad Money. CEO appearances caused a temporary bump in stock price. Then Kudlow Report and “free market capitalism.”

Key point was people use analytical ability to rationalize rather than analyze: “if your torture the data long enough, it will confess” (p. 454). Shane Frederick introduced the cognitive resource test (CRT) as a test, like the cost of a bat and ball is $1.10 … People are mental misers, System I over System 2, using System 2 to rationalize (“System 1’s press secretary”). The base rate is important.

Philip Tetlock focused on forecasting, noting that data analysis beats narratives. Hedgehogs were ideologues and predicted badly. Foxes looked at competing explanations and predicted better. Expertise helped foxes, but worsened hedgehogs. Readers of high-quality news sources provided relatively good knowledge.

People have a problem with self-affirmation, thinking well of themselves. “It is hard to ask someone why they got it wrong when they think they got it right” (p.460). Media fame was the forecasting kiss of death, with media favoring “boomsters over doomsters,” think hedgehogs: authoritative-sounding experts, ratings-conscious media, and public attention: “media-darling hedgehogs fond of extreme predictions” (p. 460).

Beardstown ladies claimed a 23.4% increase in stock market value for 10 years; it turned out the reason was that return included their membership dues and their real return was a mediocre 9%. Then, Wall Street Week with Louis Rukeyser was always bullish. This was a goldmine for panelists, but Gail Dudack was dumped by having her image appear with a dunce cap for not being positive enough.

Chapter 15: Madhis and Caliphs. The Koran contains almost no prophecy and Muslim eschatology is messier than Christianity based on hadith (alleged saying of Mohammed). Islam has been in decline since the 16th century with the rise of Western Europe. Anti-Semitism is part of the story with the mention of Jewish world conspiracies. A Sufi cleric called himself the Mahdi (“Rightly Guided One”) and killed General “Chinese” Gordon in the 1880s. General Kitchener recovered Khartoum, where Churchill was a lieutenant. The bin Saud family conquered Arabia and established a dynasty, then oil was found. Bin Laden established Al-Qaeda, then 9-11 happened.

Epilogue. Mimicry was shown in Stanley Milgram “obedience” and Philip Zimbardo’s “Stanford Prison” studies. Enron showed how contagious irrationality and moral corruption could be. Nazi prison guards after the war seemed normal people and considered themselves ethical participants to rid the world of “Jewish vermin.”

If people were rational, they would use Bayesian inference for opinions and decisions. However, many view the world as Manichean with a stark contrast between good and evil. That includes today’s Islamic State.

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