Extraordinary Popular Delusions & the Madness of Crowds

Extraordinary Popular Delusions & the Madness of Crowds is one of my favorite books and included in it is one of my all time favorite quotes:

Men, it has been well said, think in herds ; it will be seen that they go mad in herds , while they only recover their senses slowly, and one by one!

– Charles MacKay, from EPD&MC

That’s as true now as it was in 1841 when Charles MacKay published his tome.

The book is written as a series of stories in three categories: “National Delusions,” “Peculiar Follies” and “Philosophical Delusions.”  Each little story is 10-50 pages in length and the entire book is nearly 3 inches thick.  I confess that when I first bought the book in 1999, it took me a full year to read it as it sat in my “reading rack” in my bathroom.

The three stories that the book is most famous for are the “economic bubbles” specifically, tulip-mania, the South Sea Company bubble and the Mississippi Company bubble.

Each of these bubbles was based on irrational exuberance driven by “new rules” and innovation in the absence of any oversight or regulation.  And, of course, each bubble crashed leaving most people disillusioned and poor.

The true moral of the story is that if you don’t know history you are doomed to repeat it.

But even that doesn’t go far enough.

I read this book in 1999 at the height of the internet bubble and still wasn’t smart enough to short the market in time.  And then 5 years later, I bought a house at the height of the real estate bubble!  I hear that I’m not alone.  I guess some people never learn…

So as penance I’m going back and re-reading this great book and as part of my public service I want to ask you to also read this book.  Recovery from a bubble is a very individual task (as opposed to the very public mania of how we got into this).  Take this opportunity to reach out to someone you know who got caught up in the credit bubble and recommend this book.