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Book Review: Extraordinary Popular Delusions and The Madness of Crowds—Avoid Following the Herd

 

In the 2011 film Salmon Fishing in the Yemen, a life-changing decision by the character, Dr. Alfred Jones, is symbolized when he turns himself around and walks against the current of a crowd that is all traveling the same direction on a sidewalk. Often success in business comes from avoiding the follies of the group and independently developing a different plan. The first and still considered one of the best, books on this subject is Extraordinary Popular Delusions and The Madness of Crowds by Charles Mackay. Its principles and examples of group behavior are just as important today as they were when they were first published in 1841.

The author, Charles Mackay (1812-1889), was a Scottish journalist and author.   While a journalist, he researched and compiled the accounts that form the basis of the two volumes known as Extraordinary Popular Delusions and The Madness of Crowds. Unlike the popular sensational journalism of the time, Mackay provided several heavily-researched and detailed historical anecdotes of the pitfalls of group behavior. His examples of the problems that occur with group behavior have been used by modern social psychologists and economists to describe the dysfunctions of following “the crowd.” It is also often cited by analysts to explain the boom to bust behavior that perpetuates in stock markets.

A general theme found in Mackay’s book is that humans have the tendency to develop a herd mentality. The individuals in the herd then act and react to one stimulus after another in similar and predictable ways.  Mackay theorized when the herd develops “a madness” it can lead to a downward spiral of behaviors that often have very negative consequences. In addition, once this madness occurs it is usually takes individuals, with great difficulty, to break with the norm in order to stop the behavior.

Mackay narrates several historical events to illustrate the negative (and sometimes bizarre) effects that can arise out of a group mentality. These events include the Mississippi Company bubble, the Witch Mania (It wasn’t just in Salem, Massachusetts.), and the South Sea Company bubble as examples of when a group of seemingly rational individuals developed irrational thoughts and behaviors that led to very negative consequences.

The often-cited example in Extraordinary Popular Delusions and The Madness of Crowds is the Tulip Mania, which arose in Europe in the 1600s. The tulip, a simple flower, with its origins in Constantinople, was at first a novelty item for the very wealthy in Europe. Tulip bulbs then evolved from novelty item to status symbol for the upper and middle classes where they became the concentration of serious financial speculation. As the mania amplified, tulip bulbs began being purchased by investors and merchants who utilized most (if not all) of their assets. Producers sold the bulbs for property, gold, and monetary amounts that still seem exorbitant by today’s standards. This pattern of “madness” devolved into wild speculation and hoarding which tainted the region’s economic markets. As often occurs, the speculation then piloted a downward spiral that depressed markets and negatively affected producers for years.

The power in the message of Extraordinary Popular Delusions and The Madness of Crowds is in its timelessness. These same fits of “madness” can be seen today by simply opening the newspaper.   The modern-day observer need only look as far as Cabbage Patch Doll fever in the 1980’s, the Beanie Baby craze of the 1990’s, or the real estate market crash of the last decade as modern-day “tulips.” Other recent examples which appear a few times a year are the crowds of people who camp out for days in order to purchase the newest technological gadget, which can be purchased a couple of weeks (sometimes only days) later by simply walking into the store. Then there are examples of the tensions which dissolve into fights seemingly every Black Friday over a $25 toy at the big-box store, the stock market tech bubble, the successful fraudulent financial schemes orchestrated by Bernie Madoff and similar individuals. The list goes on…

The primary goal as an individual and businessperson is to notice when this herd mentality occurs and to avoid being swept up in the “madness” that can often have disastrous results.  As in Salmon Fishing in the Yemen, going against the current of a crowd will serve your personal and business interests well. Success will often come from avoiding the follies of the group and independently developing a different plan.

© 2014 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

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This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

 

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