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.
—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,
"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
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."
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."
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
"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."
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
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
"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."
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 &