The Stuff Of The Frenzied Crowd

Social and cognitive psychologists have identified a number of predictable errors (psychologists call them biases) in the ways that humans judge situations and evaluate risks. Biases have been documented both in the laboratory and in the real world… - Nobel laureate Daniel Kahneman

An impossible creature who never existed, “rational economic man” is an egghead yeti of sorts - an abominable snowman of lost legend, roaming the stuffy halls of academia.

Like his furry Himalayan counterpart, rational economic man has been thoroughly exposed as a hoax. Only a few cantankerous die-hards remain snowed by him. (Snowman… snowed… get it? Rimshot, cymbal crash, groan.)

The great debunking was due, in large part, to the work of noted psychologists Daniel Kahneman and Amos Tversky. In the late 1970s, Kahneman and Tversky developed something they called “prospect theory.” (Which, confusingly, had little to do with prospecting and everything to do with human behavior.)

Kahneman and Tversky’s prospect theory was, at long last, a real-world answer to the hopelessly sterile “utility theory” of neoclassical economics. Based on observed human behavior, rather than abstract blackboard calculations, prospect theory laid the groundwork for the discipline of behavioral economics… and was thus a big nail in the coffin for Homo Economicus Rationalis.

In recognition of his groundbreaking work, Kahneman won the Nobel Prize in Economics in 2002. (Tversky, sadly, had passed on by that time, and prizes are never awarded posthumously.) In the past few years, behavioral economics has developed a bit of pop culture cachet, catching nods in hastily written articles and books.

As a result of this, cognitive biases are practically old hat as a topic of discussion in some circles. (You can, in fact, find a very nice list of them on Wikipedia.) Yet, though cognitive biases have duly made the rounds as cocktail party chatter, few have truly pondered their influence on the crowd… and, by way of extension, the crowd’s inevitable influence on how markets work.

Righteous Monkeys and Bluffing Crawdads

It is very hard, if not impossible, to pinpoint where genetics ends and culture begins. In many ways, they are two sides of the same coin, and cultural examples of genetic hard-wiring abound in nature.

Consider, for example, that even monkeys have an inborn sense of fairness. As The Wall Street Journal reports:

Even when little or no effort is required, chimps and capuchins balk at unfair situations, says anthropologist Sarah Brosnan of Emory University. In a series of experiments, the animals learned to trade a ‘token’ (a rock or plastic pipe) with a trainer for food. If they saw a cagemate trade for a delectable grape, but were offered a cucumber in exchange for their own token, they were much more likely to refuse to hand it over for the stupid vegetable. Better to go hungry than to give in to this unfairness.

So do societal rules shape natural behavior, or do the pressures of environment shape society itself? It’s really a chicken-and-egg question. Even the lesser animals have culture and morality of a sort.

What’s more, they routinely engage in bluff, bluster and deceit when the situation calls for it - just as humans do. As The New York Times explains,

Male stomatopods [a type of crustacean] dig burrows, to which they try to attract females. Some males choose to try to evict other stomatopods from their burrows and take them over. These conflicts are dangerous because stomatopods can deliver crushing blows with their claw-like appendages.

But the stomatopods rarely come to blows. Instead, males raise themselves up and extend their appendages, like a boxer raising his gloves. The sight of big appendages causes smaller stomatopods to back down.

Yet even the biggest, meanest stomatopod has his moments of weakness. Like all crustaceans, they must molt. A freshly molted stomatopod has a soft, tender exoskeleton. Even in this vulnerable state, however, males will still raise up their claws in a bold crustacean bluff.

A poker-playing crawdad! How marvelous. One can almost imagine seven-deuce offsuit entering the picture.

The Weapons of Influence

In his excellent book Influence: The Psychology of Persuasion, further demonstrates how our genetic and cultural hard-wiring can be used against us. In a nutshell, unscrupulous practitioners can take advantage of our programming by exploiting the soft underbelly of general-purpose patterns we all rely on.

Because life is so complicated, humans tend to navigate by rules of thumb - or heuristics - without realizing it. We constantly rely on shortcuts to manage the endless flows of information we are battered with each day. As a result, certain rules of thumb can be so deep-seated we completely forget they are there. (It’s a bit like engaging the autopilot… except the decision to go autopilot is itself a result of autopilot!)

Under cover of subliminal darkness, the determined influencer can thus deliberately manipulate our autopilot rules (and, by extension, manipulate us) in various ways. Cialdini sums up this state of affairs in noting that “Although… there are many situations in which human behavior does not work in a mechanical, tape-activated way, what is astonishing is how often it does.”

The rub is that Cialdini’s six “weapons of influence” - reciprocation, commitment and consistency, social proof, liking, authority, and scarcity - can be used for good or for ill with equal flair. The difference is often a matter of subjective opinion. Wall Street and Madison Avenue are certainly not shy in employing these weapons of influence. But then again, neither are the various evangelists of the world’s popular movements and holy causes. Where you stand on such matters depends on where you sit.

We have only scratched the surface here. Yet, reflecting on all this, you hopefully now have a better sense of what a poor state John Q. Public is in. He is bandied hither and thither by his genetic wiring without even realizing it. His perception of the world is distorted six ways to Sunday by cognitive biases he may not even be aware of. And last but not least, he is constantly being pushed and pulled by benign and not-so-benign interests, all of them intent on using Cialdini’s “weapons of influence” to make him go a certain way.

Add the strong emotional tang of fear and greed to this mix, and here you have the basic building blocks of crowd behavior. Get a few hundred thousand (or better yet a few million) John and Jane Q’s together, stir them up with the right cocktail of influences, and there are precious few limits as to what they might think, say, or do.

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