Article Based on The Crowd, Le Bon

Gustave Le Bon, whose work, The Crowd: A Study of the Popular Mind, became his best known
publication. Published in 1895, Le Bon enhance the understanding of crowd psychology by proposing
several theories of how people’s beliefs and actions are altered in a “crowd” state.

What is the “crowd’? According to Le Bon,

Today, the influence of the crowds has never been more relevant. The speed of news dissemination and
rapid information cascades cause beliefs and opinions to spread like an out of control epidemic.

For investors and financial professionals, we must analyze more than ever of the facts and opinions we
accept in our mind. The information deluge is constant. It’s a fuzzy, almost imperceptible line to
separate our own opinions from the opinions of the masses. And I believe that battle is continually lost
by lackadaisical investors who let their guard down when accepting investing beliefs, theories, and
decisions.

Because we, as humans, are susceptible to overconfidence, we assume the crowds have no influence on
our mind. It’s always other people’s problem, not ours. We are way too smart to be influenced by
crowds. I wish that were true, but research studies clearly indicate otherwise.

How do we fight against becoming the “crowd” and learn to combat the ideas, from frivolous or
dangerous, from polluting our mind?

Based on Le Bon’s work, I have adapted 8 lessons and ideas to mentally arm your mind to defend against
crowd behavior.

It’s not an easy or painless endeavor. As Le Bon stated, “Science promised us truth, or at least a
knowledge of such relations as our intelligence can seize: it never promised us peace or happiness.”
Understand crowd psychology and our mental faults is not comfortable nor easy to overcome. We might
not like the path or the outcomes, but ignoring science dooms us to forever remaining in the crowd.

1. The Struggle of Maintaining Independence

It is only by obtaining some sort of insight into the psychology of crowd that can be understood how
slight is the action upon them of laws and institutions, how powerless they are to hold any opinions other
than those which are imposed upon them, and that it is not with rules based on theories to pure equity
that they are to be led, but by seeking what produces an impression on them and what seduces them.

The goal is to understand how a crowd’s ideas impose their will on our minds. The first step is always
understanding the development process. The second step is creating a method or framework to fight
back.

We see that the disappearance of the conscious personality, the predominance of the unconscious
personality, the turning of feelings and ideas in an identical direction by means of suggestion and
contagion, the tendency to immediately transform the congested ideas into acts. These receive the
principal characteristics of the individual forming part of a crowd. He is no longer himself, but has
become an automaton who has ceased to be guided by his will.
Whenever we self-identify with a crowd, whether consciously or unconsciously, we strip away our ability
to remain objective and rational. It’s evident in politics and religion. Ever try to have a logical political or
religious debate? How quickly did it devolve into anecdotal campaigns full of ad hominin attacks and red
herrings? Most people quickly move into defensive positions and start to defend their identities, rather
than the argument. Once that happens, all logic and reason disappear and no progress is made.

The crowd is at the mercy of all external exciting causes, and reflects their incessant variations. It is the
slave of the impulses which it receives. Isolated individual may be submitted to the same exciting causes
as a man in a crowd, but as his brain shows him the in advisability of yielding to them, he refrains from
yielding. The truth may be physiologically expressed by saying the isolated individual possesses the
capacity of dominating his reflex action, while crowd is devoid of this capacity.

Remember, the crowd doesn’t search for the facts or the truth; it’s in constant search of excitement,
novelty, and reward. If you understand that, you are prepared to analyze events with a free mind. By
remaining outside the crowd, you retain your capacity to evaluate the situation independently, instead
of relying on the crowd. It’s never a problem to agree with the crowd, as long as you come to that
agreement through independent means. And doing that is never easy.

2. Excitement and Novelty Drive Belief

The exciting causes that may act on crowds been so buried, and crowds always opening them, crowds
are in consequence extremely mobile. This explains how it is that we see them pass in a moment from
the most bloodthirsty ferocity the most extreme generosity and heroism.

In the 2009 financial crisis, we saw incredible swings in market sentiment. The markets would be up 10%
one day, and then have 3 successive days of down 7%, then another up day of 6%.

When crowds (especially financial crowds) operate in one direction, the market and price moves almost
defy logic. What excited a crowd one day is erased with a terrifying reversal in sentiment the next day.
These actions are unpredictable and wild. Although we try in vain to understand what is happening, it’s
sufficient to attribute these moves to crowd behavior. Don’t waste time and energy trying to dissect the
“meaning” of what these moves mean. There is no meaning, other than investors are all behaving under
the spell of crowd psychology. While other factors, like leverage, enhance these effects, the root cause
is always the crowd on one side of the trade.

They may be animated in succession by the most contrary sentiments, but they will always be under the
influence of the exciting causes of the moment…Still, though the wishes of crowds are frenzied they are
not durable. Crowds are as incapable of willing as of thinking for any length of time.

On the positive side, the extreme swings don’t last. Fundamentals eventually matter, and the crowds
that operate irrationally eventually run out of assets to sell or run out of money to buy. The best course
of action is sit back and remain vigilant. These are the opportunities to take advantage of the crowd, by
using their instability against them.

3. Shuts Off Thinking

A crowd is not merely impulsive and mobile. Like a savage, it is not prepared to admit that anything can
come between its desire and the realization of its desire. It is less capable of understanding such an
intervention, a consequence of the feeling of irresistible power given it by its numerical strength. The
notion of impossibility disappears from the individual in a crowd.

Investors during the 2000 Tech Bubble and the 2006 Housing Bubble understand why the notion of
impossibility disappears from individuals in the investment crowd. During those bubbles, tech and
housing assets were can’t miss opportunities, and no amount of rational thinking could prevent
investors from believing it was different this time. These assets couldn’t fail because of new paradigms,
due to the Internet emergence in 2000 or the unending real estate boom in 2006. The power of owning
these assets reinforced the beliefs that these assets couldn’t go wrong. But they did, and in a big way.

The improbable does not exist for crowd, it is necessary to bear the circumstance well in my to
understand the facility with which are created and propagated the most improbable legends and
stories…The simplicity and exaggeration of the sentiments of crowds have for result that a throng knows
neither doubt nor uncertainty.

Legends and stories, not facts and data, drive investment booms and busts from healthy to extreme. It’s
the stories that convince us of the invincibility and permanence of new ideas. During a bull market, our
minds run wild with the possibilities of fantastic gains and newfound wealth. During a crisis, we believe
everything is going to zero and assume permanent financial destruction.

The commonality behind both situations is our reliance on stories, rather than relying on factual
research and historical lessons. We quickly dismiss any logical approach, because we attach our opinions
to the feelings of the crowd, which has become an unstoppable tidal wave.

Whether the feelings exhibited by a crowd be good or bad, they present the double character being very
simple and very exaggerated. On this point, as on so many others, and individual in a crowd resembles
primitive beings.

We become primitive, in the sense we abandon our developed cognitive processes and let our reptilian
brain direct our actions. Our primitive brain is well-designed for living 2,000 years ago, but has not
adapted to the modern financial world. Because fear and greed operate on our basic, primitive minds,
we must deliberately switch to our higher cognitive mind to think clearly.

4. Emotion Dominates Facts and Evidence

An individual may accept contradiction and discussion; a crowd will never do so.

For it must not be supposed that merely because the justice of an idea has been proved it can be
productive of effective action even on uncultivated minds.

The chain of logical argumentation is totally incomprehensible to crowds and for this reason is
permissible to say that they do not reason or that they reason falsely and are not to be influenced by
reasoning.

Crowds dismiss all alternative explanation and contradictory evidence. There are excuses for everything,
and no amount of facts or reason will persuade a crowd.

Evidence may be accepted by an educated person, but the convert will be quickly brought back by his
unconscious self to his original conceptions. See him again after the lapse of a few days and he will put
forward a fresh his old arguments and exactly the same terms.
We can educate, train, and then educate some more, but still never escape the grasp of the crowd. It
takes significant training to re-wire our brains to instinctively recognize and fight the influence of the
crowd. It doesn’t happen overnight.

I’ve personally experienced and seen others attempt to change behavior by just assimilating more
information and assuming that will change behavior. Because our behavior is based on cognitive
processes evolved over millennia, it’s going to take more than one day’s worth of new info to make the
change.

That’s why you see investors make the same, repeated mistakes. We can spend all day convincing
people of one thing, only to have them revert back within a few days. The reason is two-fold: It’s the
brain’s way of resisting change and our ill-designed attempts to convert behavior. Permanent, long-term
behavior modification requires repeated exposure under live training. Anything else is a loser’s game.

A longtime is necessary for ideas to establish themselves in the minds of crowd, but just as long a time is
needed for them to be eradicated. This reason crowds, as far as ideas are concerned, are always several
generations behind learned men and philosophers.

When we think of learned men and philosophers within investing or business, we gravitate toward the
those who have proven their investing acumen over decades. JP Morgan, John Rockefeller, Andrew
Carnegie, Ben Graham, Warren Buffet, etc. All exceeded their generation by operating outside of the
normal, crowd state. Our goal is to incorporate the lessons of the historic greats and operate with
different principles than the crowd. It’s not enough to just know different information. We must operate
with a different set of principles than the crowd: independence, grit, intelligence, foresight,
contrarianism, obsession, etc.

It is not than the facts and themselves that strike the popular imagination, but the way in which they
take place in our brought under notice. The epidemic of influenza may very little impression on the
population because they happened a little at a time, as opposed to one giant event that would’ve caused
an uproar among the population.

5. Strong Beliefs are Fine, But Be Open to Change

A person is not religious solely when he worships a divinity, but when he puts all the resources of his
mind, the complete submission of his will, and the whole sold ardor of fanaticism at the service of a
cause or an individual becomes the goal and guide of his thoughts and actions.

It’s fine to have beliefs, and strong beliefs at that. But those beliefs need at least 3 qualities:

1. Evidenced based – there is tremendous historical and fundamental data to improve investor’s
decision making. It’s not always perfect, especially when thinking about the future. But there is
no room for mythical or untested beliefs to drive investing decisions.
2. Ability to modify or reverse opinion – strongly held beliefs should be changed when the weight
of the evidence tips too far on the side of change. Beliefs should be held tentatively, ready to be
changed when sufficient data/evidence is presented. Some beliefs may change daily (the idea
that because prices move daily, what is a terrible deal at one price is a great deal at another
price) or may be rarely change (the idea that investing and saving for the future is a good thing).
 There’s no easy answer to this, other than to evaluate each belief on its own when new
evidence is presented.
3. Separate beliefs from your identity – if you attach beliefs to your identity, personality, or other
personal trait, you run the risk of keeping beliefs not because they are correct, but because you
become more interested in defending your ego and reputation. For example, if you always self-
identify as bullish and optimistic on the stock market, it’s challenging to change your mind when
the market is overvalued, because you have created a reputation and identity as someone who
loves stocks. People might question why you have flipped. It’s hard to have the guts to change
your mind.

You’ve created cognitive dissonance, where your identity is telling you one thing (buy stocks)
and the evidence is telling you another (sell stocks). The identity always wins, because our minds
have a bigger interest in protecting our identity than searching for the truth. This is deadly for
investors. So instead of taking a hard stance on investing topics, don’t create reputations or
identities that make it painful to change your mind.

The masses have never thirsted after truth. They turn aside from evidence that is not to their taste,
preferring to deify error, if error seduced them. Whoever can supply them with delusions is easily their
master, whoever attempts to destroy their illusions is always their victim.

Many investors are eternally searching for the magic formula or guaranteed path to riches. They spend
thousands of dollars on programs and systems that supposedly “reveal” the inside secrets of investment
success. When viewed through a logical, rational lens, these claims are ludicrous and insane. But when
viewed through the “crowd” lens, these programs make perfect sense. They appeal to investor’s desire
for a can’t miss system, no matter how incredulous they may be. The crowd jumps from system to
system, because when one fails, there must be another savior around the corner.

Investors have to recognize when they fall under the spell of delusional, yet seductive systems that
promise riches. It’s an inherent bias we all have to fight, and the minute we let our guard down, we
succumb to our primal, crowd-based motives.

The experiences undergone by one generation are useless, as a rule, for the generation that follows,
which is the reason why historical facts, cited with a view to demonstration, serve no purpose.

There are many well-known quotes about investor’s propensity to forget the lessons of the past. There
are several reasons for this:

1. We assume the people in the past were unsophisticated/dumb and there is no way we will ever
make those same mistakes – WRONG. While we have certainly advanced as a society, past
problems were usually never the results of a relative disadvantage in IQ or decision making.
While we may know more today, we are also making decision is a world that is more
complicated and uncertain than it was in the past. So in absolute terms we may have an edge,
but we aren’t playing the same game. We are in a tougher environment, so we are relatively no
better off.
2. Hindsight is 20/20 – With the benefit of hindsight, we create all sorts of reasons why we
wouldn’t have made those same mistakes. But it’s always obvious in retrospect, never in real-
time. If you think it’s so easy, write down some can’t miss ideas today, and track those over a
 course of 3-5 years. Chances are at best, you will have as many misses and wins, if not more
misses. It’s a simple experiment to prove how hard it is to move hindsight into foresight.
3. We assume the environment today is more predictable because we have access to more
immediate information. Yes, we do have more information, and some of it is extremely valuable.
However, that information comes with a lot of noise, meaning data or information that has no
predictive use or functional utility. And the catch is, it’s really hard to separate those two
groups. We often get a mess of data and try to figure out what is news and what is noise.
There’s never a clear answer, because what is useful to one person is different than another.
This reinforces the idea of being very clear what edge you have and knowing your circle of
competence. Once you start to drift outside your core, you make all sorts of mistakes, including
mistaking noise for news.

6. Understand Psychological Tricks of Leaders, the Media, Forecasters

We’ve already discussed the mental errors and problems dealing with unpredictable and complex
situations. But there is even more trouble for us.

Among the countless forecasters, investing experts, and market wizards, are many charlatans, con men,
and promotors who want a slice of our wealth. These are both people and corporations, who are
designed to offer help and ideas but are full of bad advice and misdirection. To defeat them, you have to
know the tricks they play. Le Bon suggests a number of situations and triggers to watch for to
understand when you are being pulled in the wrong direction.

We have already shown the crowd or not to be influenced by reasoning, and can only comprehend rough
and ready associations of ideas. The orators who know how to make an impression upon them always
appealing consequence to their sentiments and never to the reason. The laws of logic have no action on
crowds.

The first idea is to understand they always appeal to emotion, not reason. They sell with stories and
dreams, not verified facts and evidence. If they based their approach on raw evidence, 1) they’re
performance/client results wouldn’t look as good, and 2) it does little to inspire wealth and riches when
looking at cold numbers. They need to get you excited to get rich, or at least distract you from the flaws
and risks in their argument. So always listen and separate fact from story.

Given to exaggeration and its feelings, a crowd is only impressed by excessive sentiments. An orator
wishing to move a crowd must make an abusive use of violent affirmations. To exaggerate, to affirm, to
resort to repetitions, and never to attempt to prove anything by reasoning or methods of argument well
known to speakers at public meetings.

The leaders we speak of our more frequently men of action than thinkers. They are not gifted with keen
foresight, nor could they be, as is quality generally conduces to doubt inactivity. There specially recruited
from the ranks of those morbidly nervous, excitable, have to range persons who are bordering on
madness. However absurd may be the idea they uphold or the goal they pursue, and images are so
strong that all reasoning is lost upon them.
Compelling ideas are sold by the extremeness…

These leaders are often subtle rhetoricians, seeking only the personal interest, and endeavoring to
persuade by flattering base instincts.

It is terrible at times to think of the power that strong conviction combined with extreme narrowness of
mine gives a man possessing prestige. It is nonetheless necessary that these conditions should be
satisfied for man to ignore obstacles and display strength the will and a high measure. Crowds
instinctively recognize and men of energy and conviction the Masters they are always in need of.

Two elements are present to persuade a crowd. Strong conviction and extreme narrowness. The
conviction delivers overwhelming superiority and force that the ideas seem right, even if they are
baseless. Extreme narrowness is used to reinforce that there is only one way to do something or one
thing to believe. It leaves no room for alternative explanations or doubt, because that would undermine
the force of the message.

7. The Spread of False Beliefs

When however it is proposed to imbue the mind of a crowd with ideas and beliefs – with modern social
theories, for instance, the leaders have recourse to different expedients. The principle of them are three
and number and clearly defined it – affirmation, repetition, and contagion. Their action is somewhat
slow, but it’s effects, once produced, are very lasting.

The first is that as the old beliefs are losing their influence to a greater and greater extent, they are
ceasing to shape the ephemeral opinions of the moment as they did in the past. The weakening of
general beliefs clears the ground for crop of haphazard opinions without a past or future.

As economic and investment cycles progress, investors abandon common-sense, fundamental principles
are gravitate towards riskier, crowd-like behavior. There is always a rationale why the old beliefs don’t
matter and the new ideas must be the new answer.

A second reason is that the power of crowds being on the increase, and this power being less and less
counterbalance, the extreme ability of ideas, which we have seen to be a peculiarity of crowds, can
manifest itself without let or hindrance.

As ideas spread, they build momentum and a cult-like power that begins to defy reason and logic.
Unfortunately, these ideas don’t need any extra push when they start to spread. They build their own
momentum through the explosive exponential power of networks.

8. Why We are Doomed to Repeat Our Mistakes

Judging by the lessons of the past, and by the symptoms that strike the attention on every side, several
of her modern civilizations have reached that phase of extreme old age which precedes decadence. It
seems inevitable that all peoples should pass through identical phases of existence, since history is so
often seem to repeat its course.
One of the final lessons from Le Bon is the idea that humans continue to repeat the same mistakes of
the past. No matter how much we improve our understanding, intelligence, or technology, we have
ingrained biases and tendencies that we can never permanently overcome. Whether due to laziness or
ignorance, most people assume these lessons don’t apply to them, because it’s so hard to create an
outside, objective filter to view one’s own actions. Even though we can’t remove them, we can
circumvent and avoid the consequences by deliberately understanding the underlying causes. The key
word is deliberate, because just adding more information will not work. We need conscious effort to
understand the historical lessons and design ways of countering the effects of crowd-like behavior.