Wisdom versus Madness

Two books point out the inherent challenge of the Markets. The irony lay in their titles: they seem to be inconsistent, polar opposites — but they are not.

The first is a classic: Extraordinary Popular Delusions & the Madness of Crowds, first published by Charles MacKay in 1841. In the intervening 163 years, I see no basis for believing that Human Nature has changed much. Indeed, I doubt there will be any appreciable change in mankind’s fundamental nature over the next 163 years. (After that, between biomechanical networked implants and genetic tinkering, its anyone’s guess).

If you believe in the Madness of Crowds, then you may find shorting into bubbles to your liking, buying capitulations a viable strategy, and making contrarian plays where possible; If you “buy when there is blood in the streets,” then this is the book for you.

The other work is called: The Wisdom of Crowds by James Surowiecki. If expressions such as “Don’t fight the tape,” Go along to get along, and “The trend is your friend” appeal to you, than this book has your name on it.

Now here’s where things get funky: Not only are these books not mutually inconsistent, they are actually somewhat complimentary to each other.

They merely reflect different phases of markets. Bull markets start out from periods of disbelief, doubt, and discomfort. After a period of time, the fear levels dissipate. More people buy in. Economies expand, situations improve, the market moves higher. There’s still some levels of disbelief, naysaying, FUD.

The next leg up is caused by people who now fear they are missing the easy money. Buyer’s start chasing stocks. Things get a bit extended, but not terribly so. People who have been waiting for a pullback decide it ain’t gonna happen, and jump on board. There are some signs of froth, but nothing too crazy. So far, the Wisdom of crowds has been on display.

The next phase is where that wisdom starts to dissipate: The good economic times have been rolling. The market has been humming along for quite a few years now. The more people talk about it starting to get overheated, the higher it goes. Those who missed the more advantageous entries are getting panicky. The long side is starting to get crowded. Examples of absurd valuations are everywhere. THings are getting crazy.

New technologies breed new rules. Someone, somewhere utters those fateful words: “Its different this time.”

Deep down inside, you know its not. But still, how can you miss this? The real pile has just started. All common sense is out the window, as Wisdom morphs into Madness

Guess what happens next . . . ?


Charles MacKay: Extraordinary Popular Delusions & the Madness of Crowds

Extraordinary Popular Delusions & the Madness of Crowds

James Surowiecki: The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations

The Wisdom of Crowds

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Projected Electoral College Vote: Swing States, 8/23/04


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Chart courtesy of WSJ

Yet another fascinating poll, courtesy of WSJ. The recent SBVFT commercials seemed to have had an impact nationally, narrowing the gap between the challenger and the incumbent. According to this most recent WSJ/Zogby poll, conducted Aug. 16-21, there seems to be little impact in the Battleground States. Kerry now leads in 14 states (up from 13 early August). President Bush leads in two states.”

Here’s the Journals take on the polling data’s internals:

The contest for the White House remains tight, according to the latest Zogby Interactive poll of likely voters in 16 battleground states. Although the map is awash in blue, with President Bush leading in only two of the battleground states, down from the three states he held three weeks ago, the results in three-quarters of the states in the survey are within the margin of error — meaning those states remain very hotly contested. Mr. Kerry holds the top spot in 14 of the 16 polled states, up from 13 in the previous poll.

Mr. Bush’s lead is outside the margin of error in one state, but it’s a key one: Ohio. Only two 20th-century presidents have been elected without carrying the Buckeye State, and no Republican has won the White House without Ohio’s support since the party was founded in 1854. Mr. Kerry has top spots outside the margin in three states: Oregon, Washington and electoral-vote rich Pennsylvania.

In addition, several states continue to switch their allegiances. The survey results were closest in Florida and Missouri, where the margins between the two candidates are less than one percentage point. Both states, with their total of 38 electoral votes, have flipped between Messrs. Bush and Kerry more than once, most recently landing in the Democratic column. Similarly, the two states Mr. Bush leads in this poll, Ohio and West Virginia, have been led by both candidates at different points in the poll series. For further analysis of how these results could play out in the Electoral College, view this article

RNC in NY in one week . . .

Battlegrounds States Poll – August 23, 2004


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