Writing Worth Reading
Writing Worth Reading
So, your first book is Extraordinary Popular Delusions and the Madness of Crowds by Scottish journalist and songwriter Charles Mackay, first published in 1841.
This is a wonderful eclectic history of mass human irrationality, and a great history of financial bubbles. If you ever thought that irrational exuberance was a modern invention, a by-product of CNBC and day traders, this book will put you in your place. It’s everything from Tulipmania [in the Netherlands in the early 17th century] to the Mississippi Company and he would have loved the sub-prime mortgage bubble. It shows that as long as we’ve had financial markets, there have been these insanely irrational bubbles: the history of finance is really the history of financial bubbles.
But is it that irrational? Say with Tulipmania, if you know that one tulip bulb is not worth 10 florins, as long as you can sell it for 20 florins, it’s worth it – even if you know it’s ridiculous.
Yes, and what he highlights is that these are historical moments when financial markets basically look like Ponzi schemes. They work great, until they no longer work, and then they just collapse like a house of cards. So they work well for all the people who are selling tulips for 20 florins or 30 florins, but all of sudden, for whatever reason, when they reach 101, the market disappears. And you realise you’re paying insane amounts of money for a flower. And there’s always the moment, when you read these stories, where looking back on it, it seems so absurd. And yet you know that for every person trading tulips or investing in the South Sea Bubble it felt like a very prudent investment. It felt irrational not to invest in tulips. Just like the smartest minds on Wall Street thought that it was irrational and irresponsible to not invest in mortgage-backed securities. So this book gives you a hint of what it must have felt like on the inside, to be in the grip of this irrational exuberance – just like when Cisco was the most valuable company in the world in 2000, or when dotcom stocks that had no business plan (or a barely intelligible business plan) and never turned a profit were incredibly valuable companies. And, of course, as soon as the bubble ends, we see it for what it was – a completely irrational burst of exuberance.
And Mackay also covers topics like witchcraft and witch-hunts and alchemy?
It’s best known for the financial escapades, and that’s the stuff I find most compelling in terms of decision-making. But it’s also just a history of human mania and irrationality generally.
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Jonah Lehrer writes The Frontal Cortex blog. He is a contributing editor at Wired and has also written for The New Yorker, Seed, Nature, the New York Times and is a contributor to Radio Lab. He is the author of two books, Proust was a Neuroscientist, and, most recently, How We Decide.
Which is an opportune moment to introduce your first book, Extraordinary Popular Delusions and the Madness of Crowd by Charles MacKay. It sounds as though we haven’t even digested what Mackay was trying to tell us in 1841.
It’s a very patchy book, but it leads off with three classic financial booms and busts – tulip mania in Holland, the Mississippi scheme in 18th century France, and the South Sea Bubble. MacKay was a journalist with a fine tabloid style, and he writes it all up very entertainingly. He gets the eyewitness quotes and he finds the human foibles. And, because he was the first person to collect these episodes, his book has become the source material for a lot of later works that are more scholarly and more rigorous. And yes, when you read Mackay, you do think, “Oh my goodness, this is what’s happening now.” There are extraordinary parallels.
For example?
In periods of speculation, people start trading derivatives of whatever the primary commodity might be. During the South Sea Bubble they were speculating not only on sailcloth for the expeditions, but on options to buy the sailcloth.
James Surowiecki wrote a recent book called The Wisdom Of Crowds. Are the wisdom and the madness reconcilable?
Surowiecki talks about the way in which crowds of people making independent judgments can come up with good decisions. But if you have a coordinated mass hysteria, that’s something completely different.
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John Gapper is chief business commentator of the Financial Times, where he writes a weekly column. He co-authored All That Glitters, an account of the collapse of Barings bank in 1995. His new e-book is How To Be A Rogue Trader, pegged to the story of a young trader who allegedly ran up $2.3bn of losses
