My grandmother’s meatloaf
I’ve achieved a form of Nirvana. I feel like I finally discovered what my grandmother’s meatloaf was missing. It finally clicked.
The thing that causes stock market bubbles is the same thing that causes people to join cults.
Bubbles
To illustrate what I’m talking about, let me spell out the five stages of a stock market bubble:
- Shiny new toy
- Keeping up with the Jones’
- Euphoria
- The emperor isn’t wearing any clothes
- PANIC
This pattern repeats over and over throughout history: Tulips, Spices, New World Exports, Axe Body Spray, etc.
In our desperate struggle to do better than “those other people,” we inevitably discover some very slight edge. This edge gets exploited by more and more people which creates a positive feedback loop. As more people employ this slight edge, it becomes a very big advantage. Such a big advantage, in fact, that it becomes essential. Eventually the feedback loop slows down because there isn’t enough fresh blood entering the system. Someone will come to their senses and realize that this slight edge is just a slight edge and the rest is hype. But they’re ignored because it still works, just not as well. Don’t fix what’s not on fire. Then the whole system catches on fire and people start jumping out windows.
Two opposite asymmetries
Bubbles are caused by two opposite asymmetries: the slow building of trust, and the slow spreading of bad news.
Obviously, It takes a long time to build up trust. The second factor is that no one likes to be the bearer of bad news. No one wants to be the messenger that gets shot. No one likes to be the one to tell the party go-ers that they’re being too loud and someone could call the cops.
If we were more trusting, we wouldn’t see a sharp rise. If we were more comfortable with bad news, and if we actively looked for opposing viewpoints, instead of only looking for views that reinforced our existing beliefs, we wouldn’t see a sharp fall.
Herd is the word
Herd mentality is good for when there is little data, conflicting information, high stakes, and a need for fast judgement and coordination. Humans, for all of our cunning, conniving, plotting, and planning, taste just like a gazelle. If you think a lion has escaped its cage at the zoo, don’t ask around, just start running.
Don’t drink the kool aid
It’s easy to say now, but we have the benefit of history behind us. At the time, the Peoples Temple of the Disciples of Christ sounded pretty groovy. And the Reverend Jim Jones sounded like a cool dude. In fact…
- People joined this group and made lots of friends around a common goal of religion.
- Both white and black people were joining, which meant other people felt comfortable joining.
- Eight hundred people move to Guyana to join a socialist paradise
- Congressman Leo Ryan visits and is unimpressed to say the least. The good Reverend has Ryan killed before he can leave.
- Mass suicide
Tying it together
Here’s how the two opposite asymmetries ties these two phenomenon together:
In both cases, there was too much skepticism. Yes, too much. Had more people joined Rev. Jones earlier, they might have discovered his fraudulent nature sooner. And once a few defectors knew the true nature of Rev. Jones, the information spread slowly because they were shunned as non-believers. The truth was suppressed by both the leader and the followers.
Don’t drink the kool aid… 2
So how do we prevent this from happening to us? It’s the same process but in reverse. First, we need to be intensely curious. We need to be willing to do deep dives on controversial topics. If there’s a charismatic leader on the rise, now is the best time to investigate their true motives. Second, and this builds on the first point, we need to seek out opposing views. We need the bad news to keep us grounded in reality. Any time something is too good to be true, we should be double checking.