On the wisdom and foolishness of crowds in riots and stockmarkets

Crowds are strange. In certain circumstances they can demonstrate extraordinary behaviour. James Surowiecki wrote a book (The Wisdom of Crowds) exploring this, with the classic example being one where people are asked to guess the weight of a hog. Rather amazingly, the mean answer (when people are asked to guess independently) tends to turn out right. As it does when you ask them to guess the number of sweets in a jar. In situations where you ask people to make a judgement about something they have some basic ability in, on average, they are right. Kind of spooky, but it does seem to be the case.

Stock markets depend on traders being, on average, right. They are there to make sure that assets are valued correctly (easy to forget when things seem to be going wrong), and on average, most of the time, they seem to work okay. Traders buy and sell, and come to some average agreement on what prices ought to be. So long as there are reasonably liquid markets, with lots of buyers and sellers, and where judgements are being made independently of other traders, things tend to be okay.

Then we have riots and stock market panics. It seems to me that there is a basic difference between these situations and what most of us experience in everyday life. When people stop thinking independently of one another, and start going with what everyone else is doing, things don’t work out well. In riots local protests can gradually escalate in self-reinforcing loops where things get nasty. A shooting in London resulting in a peaceful protest can end up in a riot where people get angry and start driving one another on to things they wouldn’t do by themselves. Other people in other parts of the country see it on television, and start behaving that way too. Some of those rioting will have more justification than others – they will feel that they are excluded, hated, maginalised. Others will regard rioting as a chance to take things. In either case, people are engaging in behaviour they wouldn’t normally consider. They are doing it because everyone else is.

Stock market panics also go that way too. Stock markets work well when traders are making independent evaluations of whether to buy and sell. They work badly when everyone else is panicking and they feel obliged to join in, even if they don’t know what the source of panic actually is. Do you think traders are all coming to the same view about US or Spanish or Italian (or French) debts? Hell no. They are copying one another, waiting to see where the next crowd is running to. As David Smith blogged yesterday ‘Crazy bourses – booming one day, slumping the next – if they’re not careful they’ll give financial markets a bad name.’ @dsmitheconomics.

What this seems to point to is that we need, in riots and stock market frenzies, a way of getting people to stop copying one another and start thinking for themselves again. We all have it in ourselves to cause mischief of one kind or another if we get carried sufficiently away. Stock markets tend to rebound after falls and everyone recognises that they’ve gone too far. When they do get carried away traders are generally looking for credible reasons to stop behaving like mindless selling machines, and the turning point is probably less about specific plans for governments may announce about austerity or buying debt than an event that breaks the mind-state of everyone to get them to think again. My main worry is that on financial markets no-one gets fired for following crowds, but people do lose their jobs for trying to work against them – ask fund managers. If we rewarded the first people to start buying (or the first to start selling at the height of a boom) rather than those who are simply profiting from copying crowds (over 90% of financial traded is correlated across the industry), then we might begin to get traders to think for themselves, and for momentum that isn’t helping anyone or doing the job financial markets are meant to do – value assets – to be taken away. Another route into this is the Tobin tax – a tax on financial transactions that asks a constant question before someone buys or sells an asset that asks them – are you sure?

In riots we need to find ways of getting people to start thinking as individuals again. If we can bring it people’s attention they are being filmed or traced via their phones that might make them think again, even though I don’t like the civil liberty breaches that entails. Once we forget that our actions have consequences then we are on the way to very bad behaviour. Where we have people who have very little to lose by engaging in a riot – they have no job, little hope – then the urge to stop thinking might come more quickly. That’s not an excuse, but it might be a reason. We need to find ways of reminding those engaging in riots that they will have to face the consequences of their actions tomorrow – when they will see they’ve wrecked the place where they themselves live, destroyed people’s homes and wrecked local businesses who provided much-needed jobs. I saw a tweet yesterday that said ‘Manager of one store recognised people coming in to store to commiserate today as also appearing on CCTV as looters on Monday. Incredible’ @peterjohn6. Yes it is. But it’s a reminder that those people now know what they did was wrong, and probably wish that they’d stopped and thought about things at the time rather than following the crowd.

Crowds are great when the individuals within them function independently of one another, and their action is co-ordinated to bring out differences of opinion that keep extremes in check. When everyone starts copying one another, however, extremes can result in bad things really quickly. We need ways of putting a brake on the extremes by finding creative ways to ask ‘are you sure you want to do that?’ before things get out of hand. None of us is immune to doing deeply stupid things in a crowd in the wrong situation if we don’t stop and think again. Britain isn’t ‘broken’ or ‘sick’, but it does have people and communities where there is little sense of people thinking for themselves, and acting in unhealthy groups. We need to help people in finding their own voices, so they can learn that their actions have consequences. Part of that is punishment, but a bigger part is surely helping those that feel they have nothing to lose by joining in with a riot a feeling that they are a part of this country too.