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Are Crowds Capable of Identifying Stupidity?

InvestorEducation / Trader Psychology Nov 08, 2011 - 01:50 AM GMT

By: Aftab_Singh

InvestorEducation

Best Financial Markets Analysis ArticleHerd opinion seems to be a chronically troublesome matter for the allocator of capital. Not only does the herd hold a deep suspicion for making money as such, but it seems that agreement is regarded as an imperative when it comes to considering the future. I might contend that the question; ‘How dare they consider that which all of us are unable/unwilling to consider?’ contains the primary sentiment behind the crowd’s contempt and condemnation… Supposing that this suspicion is true it might be considered quite important for us, as speculators, to overcome this. As ever, we think that it is contrary thought that reveals the key to prudence. Here I invite you to mull over the controversial question in the title; is the crowd capable of correctly identifying intelligence and stupidity?


Is ‘Common Sense’ Distinctly Uncommon?

A crowd thinks in images, and the image itself immediately calls up a series of other images, having no logical connection with the first. We can easily conceive this state by thinking of the fantastic succession of ideas to which we are sometimes led by calling up in our minds any fact. Our reason shows us the incoherence there is in these images, but a crowd is almost blind to this truth, and confuses with the real event what the deforming action of its imagination has superimposed thereon. A crowd scarcely distinguishes between the subjective and the objective. It accepts as real the images evoked in its mind, though they most often have only a very distant relation with the observed fact.

The above quote from Gustave Le Bon’s The Crowd: A study of the popular mind, really strikes us as important. The crowd is not built to diligently ensure that the concepts held in the mind correspond to the objects to which they refer. Instead, it is driven by a peculiarly fragile combination of brutish concepts (that are given to it), and that which it deems to be acceptable. In short, the endeavour of non-contradictory identification is quite apart from the intellectual activities of the crowd.

Not only is the crowd incapable of consistently dealing with presumably given objects (e.g. is such and such a just rule of law?), but also it is quite incapable of identifying legitimate links between words and concepts themselves (e.g. what in fact is a just rule of law?). Now, before you click the little x button in the top corner, I encourage you to consider that we’re close to the height of complexity in this article. In our opinion things become quite manageable when it comes to consensual conceptions of speculation. For in this business, we need only understand that the future is closed to us men. As Ludwig von Mises articulated in Human Action:

The uncertainty of the future is already implied in the very notion of action. That man acts and that the future is uncertain are by no means two independent matters. They are only two different modes of establishing one thing.

We may assume that the outcome of all events and changes is uniquely determined by eternal unchangeable laws governing becoming and development in the whole universe. We may consider the necessary connection and interdependence of all phenomena, i.e., their causal concatenation, as the fundamental and ultimate fact. We may entirely discard the notion of undetermined chance. But however that may be, or appear to the mind of a perfect intelligence, the fact remains that to acting man the future is hidden. If man knew the future, he would not have to choose and would not act. He would be like an automaton, reacting to stimuli without any will of his own.

Some philosophers are prepared to explode the notion of man’s will as an illusion and self-deception because man must unwittingly behave according to the inevitable laws of causality. They may be right or wrong from the point of view of the prime mover or the cause of itself. However, from the human point of view action is the ultimate thing. We do not assert that man is “free” in choosing and acting. We merely establish the fact that he chooses and acts and that we are at a loss to use the methods of the natural sciences for answering the question why he acts this way and not otherwise.

And if the concept of action is called into question, I need only point you to Hans Hermann Hoppe’s interpretation of the above as articulated in The Economics & Ethics of Private Property:

…like Kant before him, Mises very much stresses the fact that it is usually much more painstaking to discover [a priori synthetic] axioms than it is to discover some observational truth such as that the leaves of trees are green or that I am 6 foot 2 inches. Rather, what makes them self-evident material axioms is the fact that no one can deny their validity without self-contradiction, because in attempting to deny them one already presupposes their validity.

Mises points out that both requirements are fulfilled by what he terms the axiom of action, i.e., the proposition that humans act, that they display intentional behavior. Obviously, this axiom is not derived from observation—there are only bodily movements to be observed but no such thing as actions—but stems instead from reflective understanding. And this understanding is indeed of a self-evident proposition. For its truth cannot be denied, since the denial would itself have to be categorized as an action.

Allocating capital to avoid appearing stupid – A Folly?

I should mention that this article was prompted by a question posed by a good friend of ours — while discussing investments and markets we stumbled upon a moment where said friend uttered something that strikes the heart of the issue;

Ok, I think I understand the concept… but what I really want to know is this; is it stupid to own it?

Now I do not want to suggest that the sole motive behind his asset allocation strategy is fear of being perceived as ‘stupid’, but it seems to have some impact – it is this slight fear of embarrassment that I wish to purge from the reader’s mind.

If crowds are driven by the progression of images rather than the sober process of non-contradictory identification, then they only hold correct conceits by accident (or for extremely simple ideas). Now, as mentioned in the first section, the future is uncertain (and any man engages in an outright self-contradiction by supposing not), so surely consensual conceptions of ‘stupidity’ and ‘intelligence’ must be misguided if they refer to the peculiar art of speculation – aka pseudo-futureology!? Although individuals may disagree on their manners of speculative activities, the truth is that no allocation of capital is universally and unequivocally ‘stupid’ as such — the future is uncertain to man.

The Choice: The ‘Lucky Fool’ or The ‘Perennially Unlucky Genius’?

And so we arrive at the odd labels that are placed upon the class of people who engage in speculative activities. The crowd, in its inappropriately dogmatic fervour throws contempt upon those speculators that allocate ‘stupidly’ and elevates those speculators that allocate ‘intelligently’. And alas, because the future remains uncertain regardless of the crowd’s perception of it, these labels of ‘stupidity’ and ‘intelligence’ inevitably come to cross the distribution of profits and losses. In fact, it is our deepest suspicion that the more ‘intelligent’ the speculator by consensual standards, the more ‘unlucky’ he may inevitably be. So, we seem to come to this odd scenario where the allocators of capital are mostly ‘lucky fools’ or ‘perennially unlucky smart guys’. The crowd, with its false perception of capital allocation, would rather call it an instance of luck than change its brutish convictions.

A fantastic example of what I mean can be gleaned from the movie ‘Wall Street 2: Money Never Sleeps’. The frustration of the conflict between what the crowd considers to worthy of gain and what is actually worthy of gain is highlighted implicity throughout the film. The main character, who occasionally bamboozles the audience with his speedily articulated and detailed knowledge on ‘fusion energy’ doesn’t make the buck, whereas the guy who does – Gekko – is supposedly evil and/or capable of only the odd gutshot analogy. Gekko seems to be the crowd’s interpretation of that which crosses its conceptions on the future – evil or lucky. Note, in the crowd’s eyes you’re either the ‘lucky fool’ or the ‘perennially unlucky smart guy’… you choose…

 

The evidence isn’t restricted to film, but is also embedded into the terms in which we speak. For one, consider the word ‘fortune’ as it refers to a considerable wealth. Alternative uses of the word are related to ‘chance’ and ‘luck’, and  it seems to be derived from old words for chance; fortuna, fort-, fors. Again, quoting from Gustave le Bon’s The Crowd: A study of the popular mind, it is the crowd that ultimately governs language over time:

If any particular language be studied, it is seen that the words of which it is composed change rather slowly in the course of ages, while the images these words evoke or the meaning attached to them changes ceaselessly.

Although we may be ultimately at a loss to understand what they meant!

The word “liberty,” again, what signification could it have in any way resembling that we attribute to it to-day at a period when the possibility of the liberty of thought was not even suspected, and when there was no greater and more exceptional crime than that of discussing the gods, the laws and the customs of the city? What did such a word as “fatherland” signify to an Athenian or Spartan unless it were the cult of Athens or Sparta, and in no wise that of Greece, composed of rival cities always at war with each other? What meaning had the same word “fatherland” among the ancient Gauls, divided into rival tribes and races, and possessing different languages and religions, and who were easily vanquished by Caesar because he always found allies among them? It was Rome that made a country of Gaul by endowing it with political and religious unity. Without going back so far, scarcely two centuries ago, is it to be believed that this same notion of a fatherland was conceived to have the same meaning as at present by French princes like the great Condé, who allied themselves with the foreigner against their sovereign? And yet again, the same word had it not a sense very different from the modern for the French royalist emigrants, who thought they obeyed the laws of honour in fighting against France, and who from their point of view did indeed obey them, since the feudal law bound the vassal to the lord and not to the soil, so that where the sovereign was there was the true fatherland?

Aftab Singh is an independent analyst. He writes about markets & political economy at http://greshams-law.com .

© 2011 Copyright Aftab Singh - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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