Gambling on social hype

There was a interesting segment on NPR Radio’s Talk of the Nation the other week on the psychology of the stock market that discussed what the science of social behaviour can tell us about the causes of booms and busts.

The guest on the show was Michael Mauboussin, professor of finance and author of a recent book on the psychology of the markets.

There’s a lot of talk about the wisdom, and indeed, folly, of crowds, particularly in light of the recent economic turmoil, but perhaps the show lacks a mention of Charles McKay’s 1841 book Extraordinary Popular Delusions and the Madness of Crowds.

McKay notes how the herd mentality can lead to financial crises because people get excited about obviously foolish investments, simply because of widespread social hype.

It’s a classic in the literature that was not equalled until sociologist Robert Bartholomew examined the topic in more detail in a number of books, of which the wonderfully named Little Green Men, Meowing Nuns and Head-Hunting Panics is undoubtedly my favourite.

Link to NPR on ‘The Psychology of Stocks’.
Link to Extraordinary Popular Delusions and the Madness of Crowds info.

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