Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one

April 23, 2006 2:17 PM

Extraordinary Popular Delusions And The Madness Of Crowds, Charles McKay's 1841 classic work on mass hysteria and national crazes, still surprisingly readable and engaging. Among the classic examples in McKay's book are the South Sea Bubble, one of the earliest and largest financial bubbles, and the witch hunts of Europe (related: try the 1628 Witch Hunt simulation). Most people remember him best for his history of Tulipmania, the Dutch flower-speculation explosion of 1647 and 1648... except that it may not have been a delusion at all, but rather a rational response to changes in regulation.
posted by blahblahblah (22 comments total)

It is my solid belief that the presidency of Dubya will one day be counted on this list.
posted by docgonzo at 2:35 PM on April 23, 2006

The tulip thing is fascinating. It's interesting how complex financial markets were even hundreds of years ago.
posted by delmoi at 2:46 PM on April 23, 2006

Someday we'll all realize better than this foolish evolution nonsense, and worship Ogdar, keeper of the seven crystals of harmonic power.

Hail Ogdar!
posted by modernerd at 2:50 PM on April 23, 2006

The dotcom bubble didn't really pop. Because of massive, massive liquidity injection by the Fed, it just moved into debt and real estate, and it got a LOT worse.

It's starting to look like the real estate bubble may finally be popping. If so, things are going to get very unpleasant.
posted by Malor at 2:52 PM on April 23, 2006

It's a great book. It's too bad we live in a time when herd thinking is extolled in books like "The Wisdom of Crowds," written in answer to McKay's book.
posted by Kirklander at 3:02 PM on April 23, 2006

Have you read that book, Kirklander? The author is pretty clear to make the distinction that such wisdom cannot be extracted from crowds when the answer is unknowable, or when there is no wisdom in any of the individual members to begin with.
posted by odinsdream at 3:25 PM on April 23, 2006

Surowiecki is interviewed on the Q & A page. Has this to say:

And what circumstances can lead the crowd to make less-than-stellar decisions?

Essentially, any time most of the people in a group are biased in the same direction, it's probably not going to make good decisions. So when diverse opinions are either frozen out or squelched when they're voiced, groups tend to be dumb. And when people start paying too much attention to what others in the group think, that usually spells disaster, too. For instance, that's how we get stock-market bubbles, which are a classic example of group stupidity: instead of worrying about how much a company is really worth, investors start worrying about how much other people will think the company is worth. The paradox of the wisdom of crowds is that the best group decisions come from lots of independent individual decisions.

Dovetails nicely with the work in question (McKay), which is an excellent read.
posted by halcyon_daze at 3:42 PM on April 23, 2006

The problem is this. Consider an action that it is advantageous for individuals to take, but which becomes less advantageous as more other people take the same action. (Drive a car to work, for instance.) Each person who does the thing pays an individual cost, gets an individual benefit, and imposes a general cost onto themselves and onto others. All three of these factors vary with how many other people are doing the thing, so it's a difficult problem to model, but for each person there is a point where the individual benefit just barely exceeds the individual cost plus their share of the general cost. I theorize that the natural tendency of the model is to drive everyone to that point. Basically, people jump aboard the bandwagon of "good" ideas, until so many are doing it that they ruin it for everyone.

That's a pessimistic view though, and obviously this isn't the case for all popular practices. I think that for some things, the general cost doesn't go up with numbers of participants, and for some things it even goes down as new participants join.
posted by aeschenkarnos at 3:53 PM on April 23, 2006

This seemed familiar and a moment's googling found it first linked--not posted, let it be noted--here by answergrape in moonbird's Tulipmania thread.
posted by y2karl at 3:57 PM on April 23, 2006

Tulipmania, the Dutch flower-speculation explosion of 1647 and 1648... except that it may not have been a delusion at all, but rather a rational response to changes in regulation

I think that may be stetching the truth of the matter. Short version: investors interefered with a free-market to screw the producers, providing the possibility of high profit with low risk. So prices were artifically inflated, while supply stayed constant, triggering a bubble.

Sounds fairly similar to your average bubble to me. The difference being that this one was set in motion by legal market manipulation, rather than simple hype, as is more often the case.

I'm not disagreeing with the economist's research, but with the sloppy reporting. "That Dutch tulip bubble wasn't so crazy after all"... well no bubble is crazy while you are making mad money. There is nothing delusional in spotting a clear trend towards easy profit, and jumping aboard. The delusion is in believing the trend will never end, instead of getting out when the going is good.

(some more info)
posted by MetaMonkey at 3:57 PM on April 23, 2006

y2karl, thanks for making sure that credit goes where it was due, I didn't see the comment you mentioned, but I was going to link to the Tulipmania thread as a [prev.] but 3 out of 4 of the relevant links were dead, so I thought it wasn't worth it.

Anyhow, McKay has never been an FPP, and the other material is, I think, all new to MeFi.
posted by blahblahblah at 4:00 PM on April 23, 2006

blahblahblah: Anyhow, McKay has never been an FPP, and the other material is, I think, all new to MeFi.

McKay on MeFi. Of course, it's been awhile...
posted by dilettanti at 4:23 PM on April 23, 2006

Er, it seems it's MacKay, which is maybe why he didn't show up on a search.
posted by dilettanti at 4:25 PM on April 23, 2006

Dilettanti, it is clear my searching skills failed (I searched for the title, the author, and fractions thereof, and didn't find the previous. Ah well, enjoy the post anyway, there is still a lot of new stuff.
posted by blahblahblah at 4:32 PM on April 23, 2006

I'm enjoying it. Immensely. Some of us haven't read or researched every single post ever made here, and it is precisely links like these that I come here for.

So, thanks, blahblahblah.
posted by PareidoliaticBoy at 9:03 PM on April 23, 2006

I think that may be stetching the truth of the matter. Short version: investors interefered with a free-market to screw the producers, providing the possibility of high profit with low risk. So prices were artifically inflated, while supply stayed constant, triggering a bubble.

You're missing the key point that people didn't actually pay those prices, they only purchased options to buy at those prices.
posted by delmoi at 9:19 PM on April 23, 2006

I read this in 1999. I then tried to tell anyone who would listen that we were in a huge bubble. They got rich, I did not. There WERE enough greater fools around.

There's actually a lot of other interesting stuff in there: his description of how catch-phrases spread through London society, and his commentary on the effect of theatrical depictions of crime on behaviour both have a prescient ring (or perhaps more accurately, today's handwringing is nothing new if you read him).
posted by i_am_joe's_spleen at 11:03 PM on April 23, 2006

You're missing the key point that people didn't actually pay those prices, they only purchased options to buy at those prices.

delmoi, I think you misunderstand. I was referring to the shift from futures to options here: "investors interefered with a free-market to screw the producers, providing the possibility of high profit with low risk".

The key part is here: "So prices were artifically inflated, while supply stayed constant, triggering a bubble."

Here is the relevant portion of the article,

In November 1636, when the burgomasters' plans to screw the tulip planters took effect, traders began to process the impending changes into their thinking. By late November 1636, "buyers had already begun treating the contract prices as option strike prices set at around 10 times the actual prices." As a result, "contract prices soared to reflect the expectation that the contract price was now a call-option exercise, or strike price rather than a price committed to be paid for future bulbs." By February, the price had risen 20 times. "That's what caused the tulipmania," says Thompson.

So, the swift rise in prices for contracts on tulip bulbs in late 1636 and early 1637 was less a speculative frenzy than a market rationally responding to rule changes.

This explains how the bubble began, but does not extend to nor describe the actual bubble itself. Once the futures market had become established and commonplace, initial 'rational' investing gave way to the hallmarks of any bubble - rampant, greedy speculation.

So, simply, the bubble was kick-started by the change from contracts to futures, but was sustained by and in fact consisted of speculation. The author of the article mixes up the initial 'rational' speculation with the later wanton speculation which defines a bubble.
posted by MetaMonkey at 11:24 PM on April 23, 2006

I just re-read the first article I linked to, which presents an interesting alternate view, suggesting that the bubble didn't take place at all (as commonly percieved) regardless of futures trading. It appears to suggest that the bubble was mistakenly percieved due to the conflation of (1) a small boom (+~%30) caused by the transition to futures, (2) extreamly rare tulips sold infrequently for very large amounts as luxury goods, and (3) a speculation in common tulips developing into a kind of gambling for those with low-incomes.

So, in my understanding of the arguement, the real tulipmania/bubble was merely a combination of a lottery-style fad in taverns, and rich folk buying the odd very expensive tulip to flaunt their wealth.

Regardless of which assessment of the evidence is correct, it is indeed fascinating how trade occured so long ago.
posted by MetaMonkey at 12:03 AM on April 24, 2006

I'm so proud of our little nation that we hosted the dotcom bubble of the 17th century.

I think Neal Stephenson treats this at length in his long-winded Quicksilver trilogy.
posted by jouke at 9:32 AM on April 24, 2006

More about the South Sea Bubble here.
posted by robocop is bleeding at 9:44 AM on April 24, 2006

blahblahblah: "Ah well, enjoy the post anyway, there is still a lot of new stuff."

Oh, definitely. Sorry if my previous notes sounded like some sort of call-out. I just happened to remember the thread and was able to find it because I had commented in it; I thought that the discussion in the previous thread might interest the folks reading this one. I only had a minute to check MeFi, and my comment reflects my hurried state.

PareidoliaticBoy: "I'm enjoying it. Immensely. Some of us haven't read or researched every single post ever made here, and it is precisely links like these that I come here for."

Again, sorry for the impression I was trying to parade my superiority. I didn't flag the post as a double; I just thought the comments in the other thread might be interesting to people reading this one.

Carry on.
posted by dilettanti at 11:58 AM on April 24, 2006