Le Bon's bonbons (2)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

We will pick up where we left off with Dr. Le Bon in the last blog.  He went on in his book, The Crowd, to explain the characteristics of people caught up in a psychological crowd as follows:

If the individuals of a crowd confined themselves to putting in common the ordinary qualities of which each of them has his share, there would merely result the striking of an average, and not, as we have said is actually the case, the creation of new characteristics.  How is it that these new characteristics are created?  This is what we are now to investigate.

The first is that the individual forming part of a crowd acquires, solely from numerical considerations, a sentiment of invincible power which allows him to yield to instincts which, had he been alone, he would perforce have kept under restraint.  He will be the less disposed to check himself from the consideration that, a crowd being anonymous, and in consequence irresponsible, the sentiment of responsibility which always controls individuals disappears entirely.

The second cause, which is contagion, also intervenes to determine the manifestation in crowds of their special characteristics, and at the same time the trend they are to take.  In a crowd every sentiment and act is contagious, and contagious to such a degree that an individual readily sacrifices his personal interest to the collective interest.  This is an aptitude very contrary to his nature, and of which a man is scarcely capable, except when he makes part of a crowd.

A third cause, and by far the most important, determines in the individuals of a crowd special characteristics which are quite contrary at times to those presented by the isolated individual.  I allude to that suggestibility of which, moreover, the contagion mentioned above is neither more nor less than an effect.  The most careful observations seem to prove that an individual immerged for some length of time in a crowd in action soon finds himself – either in consequence of the magnetic influence given out by the crowd, or from some other cause of which we are ignorant – in a special state, which much resembles the state of fascination in which the hynotised individual finds himself in the hands of the hypnotizer.

In his case, as in the case of the hypnotized subject, at the same time that certain faculties are destroyed, others may be brought to a high degree of exaltation.  Under the influence of a suggestion, he will undertake the accomplishment of certain acts with irresistible impetuosity.  This impetuosity is the more irresistible, as in the case of crowds, than in the case of the hypnotized subject, from the fact that, the suggestion being the same for all the individuals in the crowd, it gains in strength by reciprocity.

An individual in a crowd is a grain of sand amid other grains of sand, which the wind stirs up at will.

Well, that sounds like a lot of fun!  It would appear that any of us might succumb to the lure and force of crowd psychology, depending on what the vision may be; social reform, political change, religious beliefs or what have you.  The same forces can be brought to bear, on a more subliminal level, in financial markets.  It pays to recognize those forces and, more importantly, to resist them.

For long periods, the stock market can be steady and tame.  It may go up and down on a daily, weekly, monthly or yearly basis with a gentle overall trend up or down, but without the gut wrenching moves that catch the attention of investors.  During those times, all seems stable.  There is always the potential, however, for the crowd to take over and move things far and fast with breathtaking force.  Remember, the crowd can be either euphoric and manic, sending the markets skyrocketing to heights never before reached or despondent and depressed, sending the markets plummeting to depths not seen in decades.

How, you ask, can all of this be avoided by the individual investor?  We’ll start working on that in the next post.

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The Crowd, A Study of the Popular Mind by Gustave Le Bon (1895) is published by Dover Publications, Inc.