The World of Social Reality

The vision of desperate investors scurrying about in a collapsing market trying to save themselves from their own foolhardiness may be amusing, but are there lessons for todays market?

History shows that group madness is not necessarily short-lived. The fear of the flooding of the Thames lasted many months; the real estate bubble was in full bloom for four or five years; the burning of witches went on for centuries. In each of these cases, the image created its own reality, reshaping the perceptions, actions, and attitudes of the crowd. How were such strange realities brought into being, and why should supposedly rational people succumb to them?

Social psychologists tell us that our beliefs, values, and attitudes lie along a continuum. At one extreme are those based on indisputable physical evidence. If I throw a crystal vase against a wall, it will shatter; or if I walk only in shorts into a blizzard, Ill probably freeze. Such outcomes, termed physical reality, are obvious and do not require other peoples confirmation. At the other end of the continuum are beliefs and attitudes that, though important to us, lack firm support. Available facts are sparse and hard to evaluate. In this category are such questions as the existence of a Creator, whether there is a "best" political system, or, of primary interest here, what a stock is really worth.

Psychologists have demonstrated that the vaguer and more complex a situation, the more we rely on other people, both for clarification and

individual; in a crowd he is a barbarian. He possesses the spontaneity, the violence, the ferocity, and also the enthusiasm and heroism of primitive beings."

Le Bon, like Mackay, was an insightful student of crowd actions. Since neither had the benefit of the psychological studies of group and crowd behavior of the twentieth century, both were less than sympathetic observers. Yet their descriptions of crowd behavior are remarkably applicable to what occurs in financial markets today. All the elements are present: numbers of people, intense excitement, and that essential, simple, beguiling image-instant wealth. Each image carries the crowd into the realm of fantasy, and sometimes beyond the boundaries of sanity.

As Le Bon foresaw, the image is not only simple and enticing, but seemingly infallible. And, as he predicted, people lose their individuality. Crowd contagion sweeps intellectuals, artists, nobles, and businessmen in every period as easily as it does the average investor.

as touchstones for our own views. This helps us reduce our uncertainty toward our own beliefs. French investors, for example, attempting to assimilate contradictory facts to put a value on Mississippi shares, undoubtedly sought the opinions of other intelligent investors. When people use the opinions of others as yardsticks to determine the correctness of their own views, they are using what psychologists call social comparison processes.

We do this frequently, rarely giving it a second thought. I was once in an Oriental restaurant in New York, where the restrooms were marked with hieroglyphics. I was stymied, until another man strolled confidently through one of the doors.

Similarly, a speaker may gauge the worth of his talk from the audiences reaction. After one of his speeches, Lincoln, judging from what he thought was a disappointing response from the crowd, tumed to a friend and said, "That plow wont scour." The speech was the Gettysburg Address.

The greater the anxiety and the more indeterminate the situation, the more readily we rely on the behavior of others, treating the information we receive as no less real than if we had directly observed it from physical reality. We forget its personal and tentative nature.

The term social reality refers to how a group of people perceives reality. As Leon Festinger, who first proposed the theory, described it: "When the dependence upon physical reality is low, the dependence on social reality is correspondingly high. An opinion, attitude, or belief is correct, valid, and proper to the extent that it is anchored in the group of people with similar beliefs, opinions, and attitudes.""* The ensuing social reality can then be a strange amalgam of objective criteria and crowd fancy. Facts, such as are available, can be twisted to conform to prevailing opinions.

This brings us back to the odd aberrations of people in crowds. In each instance, those involved found the information vague, complex, and anxiety producing. Few standards existed to help them. The real estate developers may have been right; after all, they had an almost flawless record for 45 years. During the roaring bull markets of the 1920s and late 1990s, one could see the substantial gains made by those who bought early; top Wall Streeters, shrewd businessmen, and some of the countrys wealthiest people were buying stocks and maldng fortunes, while the experts hopped from foot to foot shouting that it was a "New Era-its only the beginning."

People then, as now, hesitated, were anxious, and looked to individuals they respected to compare opinions. Great numbers were drawn by the need to examine their own views with those of the group; the larger

The Reinforcement of Group Opinion

Social reality offers an interesting explanation of why crowd behavior can often go off the charts. Research in social psychology demonstrates

its nucleus, the greater the attraction of its beliefs to those who had initially resisted them.

The record outside of the laboratory is not much different. Because there are so few objective guidelines, social reality has always had a merry time in the fashion world, for men and women alike. At the turn of the century, the dictate was for womens hemlines to drag along the ground; in other periods, they were well above the knee. In the late nineteenth century, to be au courant demanded an exceptionally narrow waist (seventeen or eighteen inches), and many a poor woman had her floating ribs removed to fit herself to the fashion image. After Twiggy, the skeletal English model of the 1960s, the fashion world had demand for hundreds of Twiggy look-alikes. Whether the increase in anorexia is partially due to this trend would make an interesting study.

Fashions and fads are no different today. Take meditation. Although its benefits have been recognized for thousands of years, the need to communicate with oneself has become almost contagious in recent years. Friends of mine now go away-with spouses-for a week or more to meditate. No sailing, skiing, tennis, or hiking, no way-youve got to get to know your spiritual self better. Ive had friends leave the un-spiritual isolation of a beautiful Rocky Mountain home or the Maine coastline to find spiritual bliss. Where do you go to meditate? To the splendid isolation of a Canyon Ranch, a La Quinta, or a Greenbriar, of course. Here, you can find solitude within a group at a mere $1,000 a day-and that often includes five-star spa food as well. Maybe this isnt a fad, but only a recession will show if spirituality can be attained alone and on the cheap.

Does the same hold true of fashions in the marketplace? Uncertainty, anxiety, lack of objective reality, and violent shifts in the image of the group drives crowd behavior here, too. Each picture of "reality" was established and maintained by consensus of the group. In every mania, the group was swept by an image of spectacular wealth, which changed its behavior. The new social reality was fabricated of the dreams, hopes, and greed of thousands of investors. Many, watching a particular bubble, have seen this clearly. Yet, most could still believe that things really would be different this time. Almost identical scenarios have been played out over the centuries, whatever the "image" of instant wealth.