“When people are free to do as they please, they usually imitate each other.”
E. Hoffer In this chapter I want to dwell on human personality and why we end up following the crowd, and how our emotions affect us. It is quite clear from what has just been written that the bulk of investors need to change their behaviour. In order to change investor behaviour, we must observe how it develops and how we can
change it. If you consistently buy into fear and sell into greed, you will make money. It sounds incredibly easy. What has already been said will probably strike you as logical; however, in practice people nd it incredibly difcult to do. We are all susceptible to the inuence of the crowd. In fact, in normal, everyday life, being part of a crowd is seen as being totally normal. In 1890 Gustav Le Bon wrote a brilliant book that is essential for any investor to read “The Crowd, A Study of the Popular Mind”. In crowd psychology, a “crowd” has different characteristics from individuals. Individuality becomes lost, as it were, and a collective mind is formed. Le Bon states that a gathering that becomes an organised crowd “forms a single being and is subjected to the law of mental unity of crowds,” and a “crowd is at the mercy of external exciting causes and reects their incessant variations. It is the slave of the impulses which it receives”. Le Bon is
making an important point in that the mind of the crowd often reects the behaviour
of the lowest common denominator in the crowd. Therefore, crowds do not exhibit highly intelligent behaviour. The person then who is capable of individual thought has a tremendous advantage. As Humphrey Neil points out: “A crowd never reasons, but follows its emotions; it accepts without proof what is suggested or asserted.”
A crowd basically exhibits the worst type of behaviour possible when investing,
combining high emotion with little or no independent thought. We, however, on
many occasions embrace the views of the crowd because it is quite normal within
society. “I sometimes think that speculation must be an unnatural sort of business, because I nd the average speculator has arrayed against him his own nature. The
weaknesses that all men are prone to are fatal to success in speculation - usually
those very weaknesses that make him likable to his fellows or that he himself
particularly guards against is those other ventures of his where they are not nearly
so dangerous as when he is trading in stocks or commodities. The speculator’s
chief enemies are always boring from within.” Edwin Le Fevre - Reminiscences of a stock Operator
Trading can be difcult and confusing because some of the character traits and impulses considered normal in society may tend to be the opposite of what is required in trading. This does not imply that trading is immoral or antisocial, but requires a different approach. In his book “Instincts of the herd in peace and war”, W. Trotter asserts that man is essentially a social animal; he is gregarious, which comes from the Latin word for ock. He is essentially intolerant of solicitude. He is more inuenced by the herd that any other inuences. He is subject to the passions of the pack, he is remarkably susceptible to leadership, and his relations with his fellows are dependent upon recognition of him as a member of the herd. “Our political, religious, business and educational institutions tend to perpetuate people having blinders on - the narrowing
of minds rather than the broadening of them.” P. Macready
Many of our modern day responses can be traced back to prehistoric times. Our
security and existence was dependent upon binding together in groups. This coming
together of groups is therefore natural to the human race. The structure of society
again reinforces this. Most societies have rules and laws within their structure that people are taught to obey. Man’s natural sociable nature and fear of loneliness or isolation also make him seek the company of others; the family unit being an obvious example. You may say that in Western society we have free thought. We do in certain areas, but there is still considerable control - obvious like laws, and less obvious like the media and modern advertising. To a degree man’s individuality of thought, which is essential to success in investing, is restricted by his own emotional make-up and structure of society. Perhaps the perfect example of how keen people are to follow each other rather than stand-alone was a well known
psychology experiment undertaken at a famous American University. The experiment was to look at the effects of negative reinforcement on learning. Students were to administer small electric shocks to fellow pupils when they failed to answer questions correctly. The idea was to increase the voltage to see if learning speed could be quickened by administering shocks with progressively higher voltages.
The student taking the shock was actually an actor and there was no physical danger.
However, the students’ keenness in this experiment is extremely interesting. At
the start of the test, the Professor in charge announced that he would take full
responsibility for the test. The students’ keenness to administer greater and greater shocks without question left the actor almost faking death. Interestingly, when one student suddenly announced he was no longer prepared to administer the shocks, due to the potential of a fatality, everyone else then refused as well.
This experiment graphically illustrates how eager humans are to conrm with the herd, and how they fail to question following an experiment that could actually lead to the death of one of their colleagues.
