Essential Trading Books – Extraordinary Popular Delusions and the Madness of Crowd

delusionCharles Mackay’s investment classic Extraordinary Popular Delusions and the Madness of Crowds will cost you around $10.00 and its over 150 years old but is simply a classic. If you see a vendor sell a system they claim can predict market tops or bottoms – or claims to be scientific this book will put you straight.

First published in 1841, shows that the madness and confusion of crowds knows no limits, when greed is involved and people succumb to the pack instinct.

He didn’t live to see the crash of 29 or 87 or the tech stock bubble – but these are no different to boom and bust scenarios which he looked at in his book. These are extraordinarily funny tales told in an entertaining fashion, of greed and naivete and stupidness.

Human nature never changes and just as in the boom and busts that Mackay describes investors is still doing them today. We simply cannot help succumbing to our emotions, especially when money is involved.

As Mackay says:

“Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper”

Books such as MacKay’s put into perspective how stupid traders are who think they can predict market behavior and that there is scientific law of human nature there isn’t and never has been.

This book covers three financial manias:

The Mississippi Madness the South Sea Bubble (from the early 1700’s) and the famous Dutch “tulip mania” of the 1600’s when tulips made gains in price that made them more expensive than gold!

“Nobles, citizens, farmers, mechanics, seamen, footmen, maid servants, even chimney sweeps and old clothes women dabbled in tulips.”

Why did people dabble in tulip speculation?

Because people bought them because they were rising in price they didn’t think that they had no real value and bid them up in a frenzied speculation until the inevitable turn

Mackay correctly points out – that when people get caught up in a crowd, they don’t stop to think logically greed rules and then its it’s too late:

“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.”

The greatness of this book lies in the way Mackay shows just how illogical humans become when emotions come into play and he doesn’t just cover finance he witchcraft and fortune tellers and a whole host of other delusions

The book doesn’t tell you how to trade – but it shows just how bizarre and how illogical human nature is. For investors who think that you can predict human behavior in scientific terms this book will make them think.

If there is one thing we can be certain of humans are unpredictable when their emotional and their actions in the short term simply cannot be anticipated – day raders note this point you can’t predict what humans will do in a few hours!

I would have thought the logic of this book was common sense – but I meet and talk to forex traders all the time, who trade dumb theories (like day trading) and a load of other traders who believe in natural law such as the devotees by Gann, Elliot and Fibonacci.

There is no scientific theory of market behavior if there was we would all know the price in advance and their would be no market. Furthermore – if it’s a scientific theory, it should be objective and work all the time and of course none of the above do.

A book like Extraordinary Popular Delusions and the Madness of Crowds reminds us how stupid scientific theories are and how unpredictable humans are. The book maybe over 150 years old – but it is as relevant today, as it was back then. There is no difference between the emotions at work in dotcom mania and the tulip mania.

We like to think we have got more sophisticated but the same emotions rule the bulk of investors today just as they did 100 or 1,000 years ago.

If you want to trade you can but you need to understand trading is game of odds not of certainties and you need to separate yourself out from the madding herd and trade un emotionally.

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