Extraordinary Popular Delusions and the Madness of Crowds

"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. 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. “The history of finance is really the history of financial bubbles.” 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. 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."

"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. 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. Surowiecki talks about the way in which crowds of people making independent judgements can come up with good decisions. But if you have a coordinated mass hysteria, that’s something completely different."