Cause,Pre-Conditions,Some Reasons for Speculative Manias & Their Aftermaths-Part.2

formation-of-a-speculative-crowd

FORMATION OF A SPECULATIVE CROWD

The existence of certain pre-conditions is necessary for a speculative mania to take place but they still do not explain why it should take place in a particular place and time. After all, such conditions do exist in many countries throughout history but it is only occasionally that a mania occurs. Psychologists, both ancient and modern, have tried to analyse speculative manias before and generally, the conclusion is that speculative manias can reach such a degree of madness because the people involved no longer behave as individuals but rather become a part of a crowd or a herd. It is like a herd of wild bisons on stampede (it brings to my mind, in particular, the stampede scene from the film ‘How The West Was Won’). Each bison within the herd has lost its own sense of purpose or direction and the stampede takes on a life of its own and is carried forward by its own momentum. The herd, once started on the stampede, charges on —irrespective of whether there are stockades, railway line or even ravine in its way. The charge just goes on and on until its energy is completely spent. Even if there is a ravine, the herd would thunder on such that thousands would perish. Thus, the use of the word ‘bull’ to describe a stock market on the way up is particularly apt.

Ironically, Merill Lynch, for a long time the world’s largest stockbroker firm, has as its symbol a herd of charging bulls! The actions of society in its mad pursue of stocks or tulips resembles closely the action of a herd of charging bisons. The only difference is that the crowd pursuing the stocks is a psychological rather than a physical one.Otherwise, they think alike and act alike without regard for reality, just like a herd of crazed bisons.

What, you may well ask, causes such a large number of otherwise sensible and normal people to become a psychological crowd in the single-minded pursuit of one object? Social psychologists are still mt very certain how the formation of a crowd occurs. However, a very important factor for a large number of people to focus their attention on one single objective is that they must be repeatedly exposed to it. I: is not possible to theorise as to how in 1929, many Americans decided to focus on stocks or in the 1620’s Dutchmen decided on tulips. But for Malaysians/Singaporeans, there are two probable factors which expose a Malaysian/Singaporean man-in-the-street continually to stock market news so much so that he too becomes involved.

First, there is a great paucity of conversational topics among educated Malaysians/Singaporeans. Social commentators have often remarked on the lack of intellectual tradition among Malaysians/Singaporeans who seldom, if ever, discuss serious affairs. It is also noticeable that there is a shortage of active hobby clubs, for example, fishing clubs or motor clubs where people of like mind can share experiences and views. When Malaysians/Singaporeans gather, the conversation tends to centre around simple everyday topics which everyone can contribute to. The stock market fits this description since discussions about the stock market by Malaysians/Singaporeans are usually centred around rumours and postulations for which everyone is as much an expert as the next person. Conversations and discussions on the stock market can thus be at once lively, interesting and yet easy to take part in.

Secondly, our local media, by accident of history, appear to devote considerable amount of time or space to the stock market. In the West, only the financial newspapers carry any amount of news on the stock market. The average man-in-the-street seldom comes across stock market news except in the briefest possible mentions. In Malaysia/ Singapore, however, newspapers and radio services cater to almost everything. Thus by buying a newspaper or switching on the radio, stock market news fall readily to hand.

It; is therefore not surprising that many Malaysians/Singaporean become very interested and participate in stock market speculations. They thus all become a part of the large psychological crowd that transcend race, social strata and income. What happens next once they become a crowd?

Gustave Le Bon, in his remarkable book‘ written as early as 1985, has this to say about what happens once people become a crowd: “…..the sentiment and ideas of all the persons take one and the same direction, and their (individual) personality vanishes A collective mind is formed possessing very definite though transitory characteristics . . They then become … a psychological crowd.‘ Once the people have become a psychological crowd, they are transformed thus:

Whoever be the individuals that compose it, however like and unlike their modes of life, their occupations or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a collective mind which makes them feel, think and act in a manner quite different horn how an individual would feel, think and act if he were in isolation.

Most dangerous of all, Le Bon continues: ‘The individuals forming a crowd acquire, solely because of their collective number, a sentiment of invincible power which allows him to yield to instincts which, had he

been alone, he would keep under control.”

Thus we can say that once a person joins a crowd, he becomes mindless and acts in accordance with the actions of the crowd. We know too that a crowd tends to not much more rashly than a single person. The action of the crowd is the end result of the collective thinking of the crowd. How does a crowd think? Le Bon writes thus:

A crowd thinks in images and each image itself calls up a fantasy of other images, having no logical connection with the first a crowd scarcely distinguishes between the subjective and the objective. It accepts as real images invoked in its mind, though they may have very distant relations with the observed facts .. .Crowds being only capable of thinking in images are only impressed by images.

In a single paragraph, Le Bon has clearly explained why speculative crowd can bid up a share or a tulip to 10 or even 20 times its original value. To them, it is not what the tulip or stock itself that matters but what they think it will become eventually. Thus it matters not if OCBC has risen from M$3.50 to M$50.00 because in their mind, the image they have can be ‘OCBC = $100.00′. Of course, we know that this image of ‘OCBC = $100.00’ has no connection whatsoever with reality but then we were not part of that crowd. Furthermore, this dissociation of reality from fantasy is continuously being reinforced by the nature of a crowd, The people who are speculating are likely to be talking with the same type of people as they themselves all the time and thus the images they have are continuously being reinforced. Thus the crowd creates its own reality as it goes along, each of them telling the others what great stocks they have been buying.

If images can be so easily created, they can just as easily be destroyed. So long as a stock is going up, it has an invincible image. What happens when it can no longer go up? The image the crowd has of it can be totally destroyed in a single instance because it has failed them. The crowd’s image of a stock can so easily switch from ‘OCBC = $100.00’ to ‘OCBC = $1.00’ since the image does not, in any way, depend on the real value of OCBC. Once the second image is in place, all the speculators will rush to try to sell first as keenly as they rushed to buy in the first place. This fact explains why in a stock market crash, it is always the market favourites which fall the hardest.

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