One book I’ve been reading with a fair bit of interest recently is Manias, Panics and Crashes, by the late Charles P. Kindleberger. It’s a great read if you’ve got the stomach for reading about finance and is rightly a great of the genre in my view.
After making it a certain way in though, it becomes obvious that tales of swindling and finance are really just window dressing for the real subject matter. Many of the things in the book boil down to group psychology leading us in bad directions. Which is interesting in itself; bank runs are a perfect example of this. Bank runs are triggered by a collective loss of confidence in the ability of a bank to redeem deposits, yet also precisely create that same difficulty. Leaving aside the obvious critique of supposedly infallible markets, this makes you wonder; in what other circumstances does one see this kind of thing?
Politics is one answer. Sport is another.1 It can happen in daily life, too. This got me wondering whether the approach to dealing with a financial panic sheds any light on how to avoid one personally. It seems like the most obvious advice is also the least enlightening: don’t set yourself up for this in the first place. It’s also probably the hardest to implement in my opinion, because it’s quite difficult to continually live your life detached from the moment. Sometimes it simply doesn’t work like that, even. This isn’t to say that thinking about the lessons of herd behaviour from history can’t help us as individuals, but it’s not as simple as acting like a central bank if you’re going off-course.
Another thought that arises from the book is also worth remarking upon. It suggests that the incidence of fraud increases during bubble times because people want their wealth to grow even faster. In turn, the book also says the incidence of fraud grows in hard times because people feel driven to it by necessity. So when does the incidence of fraud go down? If ever there was an inadvertent critique of our times I thought emblematic, it’s the one written in a mainstream history of capitalism that suggests that the incidence of fraud almost always increases.
So that’s all good, then!
Ever seen your team choke because they collectively got too worried about protecting a lead? Boy, have I ever. ↩