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
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.