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 rioting.
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 examples:
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.