By Nicholas Colas
Another day, another riot in the streets of
Athens. And another tough down day for stocks.
It’s déjà-vu all over again, as
Yogi Berra might say. But staring at the pictures from Greece,
I began to wonder about the psychological mechanics of
I am just old enough to remember the summer of 1968, when it
seemed that there were riots and demonstrations all over the
world. France came to a standstill for much of May 1968 with
violent street demonstrations and a countrywide general strike.
In the U.S. the assassination of Martin Luther King Jr. set off
a week of race riots in Washington, D.C., and 100 other cities,
including New York. In Chicago at the 1968 Democratic National
Convention, protesters fought police and National Guard troops
in the streets, which was broadcast live into American living
rooms by every major TV network.
So, what is happening now around the world
isn’t new. And frankly, given the level of
geopolitical dislocation caused by the financial crisis,
it’s not even that dramatic.
Could riots or mass protests happen in America? History
indicates that the simple answer is yes. And in case you think
large-scale protest (as distinct from the
fighting-in-the-streets, rioting variety) isn’t in
the American social vernacular, consider the following
On August 29, 2004, as many as 800,000 people protested at
the Republican National Convention in New York at the peak of
the demonstrations. On May Day 1971, Vietnam War protests in
Washington led to the largest mass arrest of Americans in
history—12,000 people over three days. In 2003 and
2005, single-day protests against the war in Iraq drew 150,000
to 200,000 people in San Francisco and Washington.
As I watched the events in Athens and the negative reaction
in capital markets, it struck me that both events are the
result of group psychology.
Throwing stones or hitting bids happen in the context of a
crowd, real or virtual. And in that crowd, students of
psychology tell us, individuals lose some of their ability to
control their own decision making.
Sigmund Freud put it well: The emotions of a man in a crowd,
said Freud, "become extraordinarily intensified, while his
intellectual ability becomes markedly reduced, both processes
being evidently in the direction of an approximation to the
other individuals in the group." I have heard a more succinct
description from many a female friend over the years: "Every
guy you add to a group lowers the group’s
collective IQ by ten points." It’s the same point
as Freud’s, without the cigar.
Since Freud’s time, psychologists have tried to
quantify and explain the nuances of group behavior. For
example, in the 1950s, Solomon Asch of Swarthmore College
tested groups of students to see how much influence such an
assemblage needed to nudge it toward an obviously incorrect
conclusion. He set up different clusters of students and spiked
some of the groups with participants who were instructed to
forcefully give the wrong answer to a simple question posed out
loud about the length of a line shown on a card. The
experiment’s findings: Three people in a group
vocally stating the wrong answer is all it takes to move many
others to state the same incorrect conclusion.
And another psychologist, Ernest Bormann, developed
something called the Symbolic Convergence Theory, which
highlights how groups form in the first place. The simplest
explanation is that the people who gather together to
protest—or to riot—already have a strong
common bond based on the cause they represent or oppose. These
are not strangers stuck in an elevator trying to make the time
pass. They share a vision and a belief system which amplifies
their shared sense of purpose. Crowds of dissidents, by
extension, have already preselected themselves into a
collection of people who share beliefs. They
aren’t just individuals walking down the street
who have decided to join a protest.
The conclusions of Asch and Bormann point to something we
know, but likely forget as we watch violent events unfold
overseas: Crowds have their own behaviors, are easily led, and
have a high degree of common purpose even if they look like
random people. Whether Greece accepts austerity is a far more
complex question than how many people take to the streets. It
should be no surprise that the Greek population is not
embracing reforms that entail higher unemployment and lower
standards of living. Or that so many people feel compelled to
demonstrate. Or that a few people can incite a crowd to
violence. All this is the fundamental dynamic of a crowd. True
on the streets of Athens, and true in trading stocks.
Nicholas Colas is the chief market strategist at technology
and trading firm ConvergEx Group.