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National News

Tuesday, 18 September, 2007 10:30 PM

Eight Truths about How Group Think Makes Us Suffer...Financially and Otherwise

Going with the crowd is rarely a good idea, but we do it anyway and suffer the negative consequences together. Best-selling author Bill Bonner and political journalist Lila Rajiva explain how the mob mentality ruins our financial and personal well-being—and why we'd all be much richer and happier if we'd just think for ourselves.

Hoboken, NJ —Remember explaining to your mother why you'd taken some (ill-advised) action because all your friends were doing it? And remember her stock response? If all of your friends jumped off a bridge, would you do it, too? she would ask, hands on hips and voice rapidly escalating to tones of incredulity. Well, according to William Bonner and Lila Rajiva—and unfortunately for you and your mother—the answer probably would have been yes. What's more, it probably would still be. It seems we humans never outgrow the powerful urge to go along with the crowd, even when the crowd's decision will result in financial loss, humiliation, physical injury, or in extreme cases, death.

"Just think about this common scene on the evening news," says Rajiva, coauthor along with Bill Bonner of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics (Wiley, 2007, ISBN: 978-0-470-11232-8, $27.95). "A sports team has just won a big game, and to celebrate it a group of otherwise sane and responsible people have collectively determined that it's a good idea to set cars ablaze, clamber up telephone poles and street lamps, and jump over bonfires. Why? Because they're no longer thinking as individuals but have given in to the 'mob instinct'—which rarely results in anything but catastrophe."

To support their contention, the authors cite scientific studies that show that our brains are hard-wired to work best in smaller groups—a phenomenon that is true even in the organization of the military. In smaller groups, people cooperate with mutual trust, according to simple rules of conduct and easily understood hierarchies. In larger groups, however, everything changes. The crowd mentality takes over.

In the course of an iconoclastic frolic through economics, politics, and history, the authors explore that mentality and its devastating effects on human behavior. Their intriguing insights help explain why we blindly follow leaders who are clearly wrong, succumb to witch hunts stirred up by pundits, and buy ridiculously overpriced stocks just at the moment when we should be selling them. The secret to understanding politics, markets, wars, fads, and manias, they write, is understanding the problem that arises when human beings make decisions as part of a big group even though they are wired to operate best in small groups. This kind of "public thinking," as they call it, is a setup for disaster.

Documenting their argument, Bonner and Rajiva describe the absurd and sometimes frightening ways in which the herd instinct drives us as individuals, as a nation, and as world citizens. Here are a few samples from the book:

What's the real reason behind the $700 billion trade deficit? Sex! Here's why. There's a $700 billion trade deficit, right? Well, why is that? Isn't it ultimately because Americans want to buy things they can't afford? Think about it and you'll see that when Americans spend more than they have in order to follow the rise and fall of all sorts of fads and trends, they do it only so they can look richer than they actually are. And that turns out to be a competitive strategy in the mating game. Why? Because if you look like you belong to a higher social class, members of the opposite sex are more likely to be impressed by you. Flashy clothes, oversized houses, cosmetic surgery—they are all ways to seduce the opposite sex.

"But then again, it's all relative," says Rajiva. "If everybody on the block buys a Hummer and puts in a swimming pool, the man who has those things is bound to quickly lose his edge. Then an arms race in consumption begins. A man has to spend even more—bringing himself even closer to bankruptcy—in order to show off. And the women he is trying to attract must wear the most expensive clothes, drive the most expensive car, live at an expensive address, and sport the most expensive jewelry. She must also appear as physically attractive as possible. Remember, it's all about sex, and a nation of individuals living beyond their means inevitably leads to a nation living beyond its means. For each gaudy trinket that adds to your allure, you're taking on more debt. While the Chinese save and manufacture the baubles they sell us, Americans pile on debt to buy what we don't need with money we don't have. Ergo, sex ultimately drives the U.S. trade deficit."

Your personal vote actually doesn't count at all. We're told how important every vote is to the country. But, if you think about it, elections have become simply a ritual of modern government. They serve roughly the same purpose as used to be served by crowning the king or bowing to the tyrant. They are all equally actions that are merely emblems of submission and adherence. Individually, none of them has any effect whatsoever on the outcome. "Voters might as well be the home crowd at a ball game," says Rajiva. "The real odds that your vote will decide the outcome of an election are something on the order of 8 chances out of 10 raised to the 8,000th power. For comparison, the number of seconds since time began is something like 3 times 10 to the power of 17. In other words, you could be shipwrecked on an island with Paris Hilton and win the lottery every day before your one vote would be decisive."

World "do-gooders" are deadly dangerous. The trouble with the big wide world is that it is never quite good enough for some people. They keep trying to improve it. No harm in that, of course. In theory, making your world a better place is a noble concept. But the world improvers are rarely content with private acts of kindness; instead, they want gas chambers . . . and social security—vast changes almost always brought about at the point of a gun. One example the authors like to cite is the Middle East, where "do-gooders" have recently set about to "help" Iraqis "reform" their government—when what they really mean is that they want to make it more like theirs.

"Private acts of charity or innovation that might actually make the world better are of little interest to the world improvers," says Rajiva. "They propose a ban on world hunger—without planting a single turnip. They take up the cause of 'freedom' in other countries—and force the liquor store next door to close on Sunday. They insist so strongly on better treatment for women in the Islamic world, they forget to kiss their own wives. Of course, ideals do matter. Honesty, integrity, honor, love, service, dignity, frugality, industry, self-discipline, charity—these are the qualities that make the world a better place. And most importantly, no one's home has to be bombed in order to make any of this happen."

You're not imagining it: both presidential candidates really are losers. Here's why. Presidential candidates are do-gooders looking to spread their good doing further than their state governorship or congressional seat will allow them. Like any do-gooder, the bigger fools they are, the more they seem to be able to get other fools to fall in behind them—so long as the other fools are confident enough. And the reason is that while all public spectacles may found themselves on insincerity, the perpetrators of the fraud (in this case, our dear candidates) are often the most defrauded of all.

"They actually believe what they are doing is for the betterment of the world—no matter how disagreeable it may be to the people being bettered," says Rajiva. "Their thoughts contain such a tangle of deception and misconception that there is never the slightest hope they will extricate themselves from their assumption of unadulterated virtue. The words wrap around their feet, the ideas clutch their throats and squeeze their hearts, but they're convinced that all of their lip service is for the public good."

We're all about to pay for the housing boom bust. As the housing boom grew and grew, many real estate agents, lenders, and members of the media hyped houses as if they were stocks. Suddenly, many homeowners came to believe they had an ATM in their bedroom. They could now regularly withdraw from the Bank of Four Walls and a Roof. A house appreciating $40,000 a year could easily provide $10,000 through refinancing or in mortgage equity withdrawal, they reckoned, and went out and borrowed—in 2004 and 2005, more than $1 trillion. And lucky for them at the time, there was no end to the number and variety of nontraditional mortgages flourishing, the most popular being subprime adjustable-rate mortgages (ARMs).

"And now the monthly payments on about $600 billion of subprime mortgages are increasing by as much as 50 percent because the two-year teaser periods are up," says Rajiva. "And as we've seen after the last couple of weeks of subprime hysteria, many of the recipients of these loans aren't able to make their payments, so loans are defaulting and mortgage lenders are declaring bankruptcy. Now they're failing, and not only is the U.S. market suffering, but so are markets around the world. The end is certainly near, and soon we won't be able to refinance ourselves out of our problems."

Don't swallow political, financial, or social slogans. Every vote counts. Stocks for the Long Run. The War Against Terror—most of what people think they know is really only a catchy slogan, the glitz thrown up by the public spectacle of the modern state. It is only a confused melee of half-understood ideas, misconceptions, prejudices, hype, humbug, and downright lies. And the worst part is that the deceivers are also the most deceived.
"Often, we are so deeply immersed in public thinking that we start believing it," says Rajiva. "We start accepting slogans that are dangerously misleading; we reduce complex ideas and contradictory information into one-sentence-explains-all snippets that the masses then understand as reasons. One rusty simplification is connected to the next until the crowd gets to where it wants to go. And when it does, it becomes thoroughly logical . . . and completely unreasonable."

The world may be getting flatter, true; but it's also getting steeper. Take Thomas Friedman's book The World Is Flat, a runaway bestseller about technology and communication leveling the playing field for all the world's peoples. Trouble is, Friedman tells only half the story. He explains how the world is leveling out. The part he doesn't get to is how the world is also getting steeper at the same time. American low-level earners are competing with a billion workers in Asia willing to do the same work for less than one-tenth the salary. And in China there is growing income inequality between those who have joined the global economy and those who have not. While the Chinese cities grow richer, the poor in China are left behind—just like America's industrial workers.

"In short, the world is getting flatter in some areas, and steeper in others," says Rajiva. "There is less difference between China's industrial workers and those in America, but the difference between the globalized employees and the capitalists who employ them is growing. Beneath the surface of Friedman's flat earth, the pressure is growing. Sooner or later, it is bound to explode."

Money problems are just around the corner for practically everyone. We appear to have reached the end of the biggest bubble of debt and credit in history. At this very moment, the public markets are teetering on the brink of a major change of direction. Five hundred trillion dollars in derivatives could be ready to explode. Fifteen trillion dollars in worldwide stock-market capitalization could disappear. And the average American house will lose 20 to 40 percent of its value as five million families are forced into bankruptcy. And practically everyone is in debt—debt that is stuffed into hedge fund portfolios as an investment, debt that is laid away at insurance companies and pension funds as an asset, and debt that is traded, extended, extruded, pressed, bolted, wrung out, and wadded up. It is debt for all seasons, all people, all times, and all places. All that excess is bound to catch up with us.

And finally, here is how all this talk about mob mentality relates to your money and your economic well-being. As a contrarian observer of the financial scene, Bill Bonner has long been well known for arguing against the dilution of the value of money by excess printing.

Now in this book, he points out that the value of the dollar since it was cut loose from gold in 1971 has been controlled not just by the bankers, or by the printing presses, or even by economic fundamentals, but, like nearly everything else in public life, by crowd dynamics! In other words, the fundamental building block of American wealth is now beholden to the same mass-sentiments that are at work in the rest of the markets. That is a fatal sign, because if history has shown us anything, it is that currencies rise and fall alongside the empires that create them.

"Over the next few years, many people are going to be ruined; fortunes will be wiped out," says Rajiva. "New groups of people will acquire wealth and power, while some of today's economic elites will be destroyed. But with your new understanding of crowd psychology, you can anticipate what crowds will do and can avoid being a victim of history. You can be among the few whose investments go up when the great mass of people lose money. And as a result, you will not only be able to safeguard your wealth, you will enhance your well-being and save your sanity."

About the Author:

William Bonner is president and CEO of Agora Inc., one of the world's largest financial newsletter companies. He is the creator of The Daily Reckoning, a contrarian financial newsletter (dailyreckoning.com). Bonner is previously the author, with Addison Wiggin, of the international bestsellers, Financial Reckoning Day and Empire of Debt.

Lila Rajiva is a political journalist, an editor at Agora Publishing Group, and the author of The Language of Empire, a groundbreaking study of the Abu Ghraib prison scandal. She blogs at mindbodypolitic.com.

About the Book:

Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics (Wiley, 2007, ISBN: 978-0-470-11232-8, $27.95) is available at bookstores nationwide, major online booksellers, or direct from the publisher by calling 800-225-5945. In Canada, call 800-567-4797.

Source: DeHart & Company

 

 

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