Saturday, September 26, 2015

Economy: Beware Of The Crowd

(Drivebycuriosity) - Often I read the term "Wisdom of the crowd". It claims that a large group is smarter than a single person. History shows that this claim is wrong, the reality is quite contrary. Crowds behave unpredictable, irrational and dangerous.

This week we heard that more than 700 people got killed in a Mecca stampede (cnn). The authorities knew this risk because stampedes happen frequently there. The Saudis invested billions of dollars into anti-stampede infrastructure and crowd-control technology (businessinsider). But all these precautions didn´t`t help, the crowds found a way to destroy themselves.

The deadly incidents happen too often. On December 31, 2014, a deadly stampede occurred in Shanghai, where around 300,000 people had gathered for the new year celebration (wikipedia). In July 2010 at least 18 people died at the Love Parade music festival in Germany when they were crushed inside a tunnel during a stampede caused by panic (theguardian).

Stampedes are known form cattle which sometimes panic all together and trample down everything which is in their way.  Lemmings are another infamous example of self-destructive crowd behavior. Stampedes are a violent form of herding behavior, the members of a group suddenly behave all in the same way.

I remember a visit at a huge rock concert in Germany, Rock am Ring 1993, where I got caught for some minutes in a maelstrom of people who moved stubbornly between the stages. I got the impression that stubborn, ruthless and aggressive behavior by individuals, like shoving and pushing neighbors, can accumulate into a deadly force.

Financial markets are influenced by aggressive herding behavior as well. Sometimes falling stock prices induce more people to sell, others follow which leads suddenly to a spiraling snow ball effect. Most of these flash crashes are relatively harmless and very short lived (wikipedia).

But sometimes herding behavior leads to nearly apocalyptical consequences. In the years 2007 and the first half of 2008 prices for oil and other commodities went sharply up, because the crowd believed that oil production has reached a peak (peak oil) and commodities are in super-cycle. Climbing prices attracted more buyers, who jumped onto the bandwagon, which amplified the price gains. In summer the price of oil price peaked at $147 (more than triple of the average price of the years before  macrotrends) which aggravated the recession considerably (econbrowser). In autumn 2008 the fall of Lehman Brothers caused a panic selling on the stock market - amplified by massive short selling by hedge funds - and the herding behavior caused a stampede of pessimism which lead to the most severe post war recession.

 I try to avoid huge crowds since my "Rock am Ring" experience. Beware of the crowds!

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