Looking Sideways: Comments on Markets, Mimetics and the Madness of Crowds (Updated)
Everything popular is wrong.
-Oscar Wilde
Several months back, I posted the following to the BEEW Feed:
2025-05-01
Loved this quote from Jordan Peterson's recent conversation with Peter Thiel:"When you stop looking up, you start looking around. And when you look around too much, it's not a wisdom of crowds, it's a madness of crowds."
-Peter Thiel
Thiel, as he often does, was referencing his late mentor René Girard's work on desire. We don't invent our desires, we imitate them. Without some belief in a divine order, a spiritual truth, or an ideal beyond material reality, we don't become more rational, we become more mimetic. We look to each other for meaning, and what follows isn't wisdom, but envy, rivalry, hysteria—the madness of crowds.
Isn't this obvious? I've always seen it this way and assumed everyone else did too. But, strangely, they don't.
Many years ago I came across Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds, a sweeping history of episodes where collective behavior spiraled into irrationality, greed, violence. It had a huge impact on me. Mackay's core thesis is that when we humans gather together in large enough numbers, we are dangerously prone to contagion and mass delusion—ideas and behaviors that spread like epidemics, often with very destructive results.
So why, I've long wondered, does the phrase wisdom of crowds have so much more cultural traction than madness of crowds?
I think it’s because the idea flatters us. It reassures us, in the aggregate, that we are rational beings. That those people over there may be clueless, biased, ignorant, emotional, but the collective us—the poll, the jury, the market—we know what we're talking about. We know how to filter through the noise and find the signal. It's strange how we blindly soothe ourselves with the comforting, dangerously simplistic belief that many minds converging on a single problem ultimately arrives at the truth.
And sometimes this is true. Sometimes the crowd does get it right. In certain controlled settings, with independent judgments and clear feedback loops, crowds have outperformed experts. James Surowiecki popularized this view in his book, The Wisdom of Crowds, where he showed that large enough groups can be astonishingly accurate. But, it turns out, this is much more the exception than the rule, which for me was a delightful relief. See sidebar.
(Sidebar: For year I wondered happened in 3rd grade when none of us came anywhere close to guessing the number of rice grains in the large jar on Mrs. Albora's desk. Once I understood it's not a wisdom of crowds, but a madness of crowds, I was finally able to stop thinking about that damn Hershey's bar.)
Mackay's and Girard's point is that independence rarely holds. (It's all fun & games until bla, bla, bla…) Once people start looking at each other instead of at reality, desire and belief become contagious. Once the crowd ceases to be a set of separate judgments, it becomes a hall of mirrors. That's when "wisdom" flips to "madness."
You don't have to go all the way back to tulip mania or the South Sea Bubble to see it. Just look at the January 6th Capitol attack. Or, the delusional mimicry that sent GameStop stock soaring overnight. Or, for the most timely example, today's markets.
You have all these people strutting around, brimming with confidence over their fattened portfolios, on the strength of our economy. Huh? Do they really not know that the Oracle of Omaha and many other legendary investors, fearful of market woe, retreated months ago to the sidelines with their Mt. Everest-sized piles of cash, while pension fund managers and everyday investors on their behalf continue to shovel money into the dangerously top-heavy Mag 7, while chasing down yet another Nvidia-juiced market high?
Are they really unaware of the growing uncertainty and fear out there? Surely they know about the softening underbelly in the data, and see the autocratic signals and reckless economic proposals coming out of Washington these days. Right? And what about more sophisticated investors? Don't they see that the aggregate P/E ratios are nearly double historical averages. That the CAPE (P/E10) is running 112% above its historical mean. That yield curves are dangerously flat, with the 10-year only half a point above the 2-year. That the federal deficit has already blown past $1.6 trillion this fiscal year. And that AI mania is hammering away at entry-level jobs, destabilizing the very workforce we'll need to sustain growth.
If yes, where's the worry? Why aren't markets panicking? Once doesn't need to know that much or look that deeply to see that our economy is in BIG trouble. So what's going on here? Is this a wisdom of crowds, or maybe, given the similarities with the dot-com bust in 2000, it's a two-decades old curtain call for Greenspanian "exuberance," or maybe, it's exactly what it looks like, a blindly complacent market madness?
Economist Paul Krugman weighed in on this very thing earlier today: "Market pricing almost never takes into account the possibility of huge, disruptive events, even when the strong possibility of such events should be obvious. The usual pattern, instead, is one of market complacency until the last possible moment. Markets act as if everything is normal until it's blindingly obvious that it isn't."
If Krugman is right, it means markets, so often celebrated as the bellwether of the "wisdom of crowds" are, in fact, deluded by their own kind of madness. Personally, I've never understood why anyone ever thought otherwise. Markets aren't prophets; they aggregate information and expectations at a moment in time. They're good at reflecting conventional wisdom, but terrible at foreseeing radical breaks, especially when those breaks come from politics rather than the economy. Despite all the data they process, they also process a staggering amount of conventional wisdom, and as such, conventional hopes and dreams, conventional stupidity, conventional complacency, conventional irrationality. Markets, in short, process a lot of human convention, and as such tend to hold the safe view until it becomes unsafe. U.S. stock markets have never been good at predicting bad events. Everything looks fine until suddenly it isn't. Even in 2008, when the housing market had already started collapsing two years earlier, markets kept partying until the floor disappeared beneath them.
And then, they lose their shit.
Why is this paradox so hard to see? The very faith people have in “wisdom of crowds” and “safety in numbers” is exactly the thing that tips crowds into madness. Complacency feels sane when everyone’s in on it. Until the moment they’re not.
“Madness is something rare in individuals—but in groups, parties, peoples, and ages, it is the rule.”
-Nietzsche
Nietzsche knew that most people don’t have very strong world-models. They believe what their friends believe, or in whatever has good epistemic vibes. In large groups, weird ideas can tend to ricochet from person to person and get established even in healthy brains.
I'm contrarian by nature, the exact opposite. Despite my long career as a risk-taking founder-entrepreneur, I generally prefer a preparedness approach to life—an admittedly exhausting if-I-worry-enough-maybe-it-won't-happen ethos. Perhaps I've been bitten a few too many times. No, actually, I have been bitten a few too many times. Though I'm entirely comfortable with risk, What I'm not at all comfortable with is surprises. I thus always privilege being ready for the madness over being swept away by the surprise of it, despite knowing full well that this particular mode of living has the uncanny ability to wreck many a perfectly wonderful day and a perfectly restful night’s sleep.
Here's another view of it. Just yesterday I was talking to close friend. After listening to me yammer on for a long while about some familiar anxieties and grievances, he counseled that it might be helpful to practice giving equal voice to the many positive things in my life as I do the negative things. You know, balance things out a bit. Carry around the half-full glasses along with the half-empty ones. I know he's right. I've given the very same advice to many others. Many times. The problem is that I don't fully buy it for myself.
In my own defense, I view sitting for hours at the bums-end of a deep worry-hole less an indulgence in what-if absolutes and more a responsible undertaking in if-then solutionism. It feels productive. Even necessary. Worry, I've thoroughly rationalized, is preparation. For me, it's a way of out-surprising surprises. For planning for what's coming before it comes. See sidebar.
(Sidebar: 1. YES, I fully understand how off-tilt this sounds, but trust me, I have my reasons, and further, trust that although this isn't the time or the place to discuss those reasons, the time and place is coming. 2. Writing is in many ways a form of utility thinking, a way of working through chaos, fear, and other intense emotions 'in situ.' Many writers I know, me included, write to work through their 'stuff.' As much as I despise the pain and frivolity of worry, it often soothes me to know, or rather, to believe, or more accurately, to delude myself into believing, perhaps, that at least I'm prepared for what may/could/will come.)
For years I've been being yelled at by drivers, pedestrians, other bike riders for riding my bike against the flow of traffic. Why the hell are they yelling at me? First off, mind your own business. And secondly, stop bowing, monkey-see-monkey-do style, to stupid “convention” without thinking things all the way through to logical conclusions. The world is wonderful, sure, but it’s also supremely complex and dangerous, and so, to the best of my ability, when possible, I like to know what I’m up against. To see things with my own eyes. And the best way to know what I'm up against when I'm riding a bike is to ride against the flow of traffic. If an eighteen-wheeler is going to run me down and orphan my children, I want to see that eighteen-wheeler coming. I want to look that driver in the eyes. No surprises.
Maybe that's the deeper point here. Markets, crowds, politics, even our friends will tempt us to look sideways, to borrow our bearings from the people around us. That's the so-called "wisdom of crowds." But the actual safeguard, the thing closer to wisdom, is to refuse to outsource our perception. To insist on looking up, and looking forward, even when it hurts.
Because, in the end, the crowds always admit they were mad all along. The only question is whether, when that truck is bearing down on you, you'll be one of the people staring straight at it or one of the glass lambs with their eyes fixed on everyone and everything else.
Vroom-Vroom!!