WEBVTT - William J. Bernstein on Crowd Behavior (Podcast) 0:00:00.080 --> 0:00:06.040 M This is Mesters in Business with Very Renaults on 0:00:06.240 --> 0:00:10.840 Bluebird Radio this week on the podcast What Can I Say? 0:00:11.039 --> 0:00:17.200 Bill Bernstein is a brilliant author neurologists, financial theorists, investor. 0:00:17.920 --> 0:00:21.400 His most recent book, The Delusion of Crowds, Why People 0:00:21.440 --> 0:00:24.040 Go Man in Groups is going to be one of 0:00:24.040 --> 0:00:28.760 those must read books in the pantheon of both bubbles 0:00:28.800 --> 0:00:35.240 and behavioral finance. He's written so many books, Birth of Plenty, Investors, 0:00:35.320 --> 0:00:40.520 Asset Allocator, four Pillars of Investing, just just just too 0:00:40.520 --> 0:00:43.159 many to mention. I find Bill to be one of 0:00:43.200 --> 0:00:49.040 those really unique people who has a number of insights 0:00:49.080 --> 0:00:54.600 into the world of investing, partly because he's a neurologist 0:00:54.680 --> 0:00:58.720 and really spent a lot of time learning how people's 0:00:58.800 --> 0:01:04.360 brains function and what drives us in our decision making process. 0:01:04.360 --> 0:01:08.679 But just as important, he's a historian and a deep 0:01:08.760 --> 0:01:13.399 researcher and author, and so not only does he understand 0:01:13.600 --> 0:01:18.160 the neurology and the cognitive science of our brains, but 0:01:18.520 --> 0:01:21.920 he is very familiar with all of the academic literature 0:01:22.319 --> 0:01:25.160 and all of the actual history of what's taken place 0:01:25.720 --> 0:01:29.279 over the past pick a timeframe five hundred, a thousand, 0:01:29.360 --> 0:01:33.000 two thousand years and so all of his work is 0:01:33.040 --> 0:01:36.720 always a deep dive. Every page is filled with so 0:01:36.800 --> 0:01:41.200 much fascinating information. I'm really enjoying Delusions of Crowds. I'm 0:01:41.200 --> 0:01:45.200 about halfway through it. All of his books are absolutely 0:01:45.400 --> 0:01:48.240 essential reading to me. So if you are at all 0:01:48.360 --> 0:01:57.560 interested in anything from cognitive theory, behavioral finance, investing, anthropology, 0:01:58.360 --> 0:02:02.600 bubble behavior, bitcoin, in Tesla, you name it, you're gonna 0:02:02.640 --> 0:02:06.440 find this to be just a fascinating dive. So, with 0:02:06.520 --> 0:02:13.800 no further delay, my conversation with William Bernstein. This is 0:02:13.960 --> 0:02:19.440 mesters in Business with very Renaults on Bloombern Radio. My 0:02:19.760 --> 0:02:23.919 extra special guest this week is William Bernstein. He began 0:02:24.200 --> 0:02:29.640 his career as a neurologist before becoming an author, financial theorist, 0:02:29.720 --> 0:02:33.919 and investment advisor. He's written a dozen books, the most 0:02:34.040 --> 0:02:38.519 recent of which is The Delusion of Crowds, Why People 0:02:38.600 --> 0:02:43.480 Go Mad in Groups. Who better to discuss people going 0:02:43.600 --> 0:02:50.519 insane than a neurologist investor William Bernstein, Welcome back to Bloomberg. 0:02:50.960 --> 0:02:54.520 As always a pleasure, Barry. So let's dive right into this. 0:02:54.639 --> 0:02:58.000 But before you were an investor and an author, you 0:02:58.120 --> 0:03:01.600 worked as a medical doctor, with this specialty in neurology, 0:03:01.680 --> 0:03:07.080 How did that background help you as an investor? Really 0:03:07.240 --> 0:03:10.280 only in a very indirect way. You would think that 0:03:10.400 --> 0:03:15.679 being a clinical neurologist would help you with psychology uh 0:03:15.680 --> 0:03:20.799 and the neuropsychology, but really practicing neurology is a very 0:03:21.360 --> 0:03:24.600 down and dirty, ground level occupation. Um. You know what 0:03:24.720 --> 0:03:28.120 I like to explain to people, uh, is that the 0:03:28.160 --> 0:03:31.360 great neuroscientists that we think of. Uh. You know, people 0:03:31.400 --> 0:03:35.360 like the Demasio's are like great artists, or Michelangelo's and 0:03:35.440 --> 0:03:38.640 da Vinci's. Or is what I did was more Sherwin Williams. 0:03:38.640 --> 0:03:41.480 It was met pain in back pain. Rather, what helped 0:03:41.480 --> 0:03:45.000 me write about finance is simply the scientific training and 0:03:45.120 --> 0:03:48.760 back of being a doctor. Uh. And you know the 0:03:48.760 --> 0:03:56.000 importance of examining data, seeking it out and rigorously analyzing it. Interesting. So, 0:03:56.000 --> 0:03:58.520 so I mentioned to some colleagues that I was going 0:03:58.560 --> 0:04:01.480 to be speaking with you, and one of them, uh 0:04:01.600 --> 0:04:04.280 said to ask you. Michael Batnick said to ask you, 0:04:04.800 --> 0:04:08.240 when you started writing Why People Go Mad in Groups? 0:04:08.320 --> 0:04:10.320 Did you expect it to come out at a time 0:04:10.400 --> 0:04:14.600 when people were in fact going mad in groups? No? 0:04:14.800 --> 0:04:17.760 This is the very definition of dumb. Luck. As it 0:04:17.760 --> 0:04:21.440 turns out, my publisher decided to delay bring the book 0:04:21.440 --> 0:04:24.200 out for about six months because they didn't want to 0:04:24.200 --> 0:04:26.400 bring it out right before the election, because they figured 0:04:26.400 --> 0:04:30.520 out would suck up too much of people's bandwidth. Uh. 0:04:30.600 --> 0:04:34.680 And so it got delayed until just at the moment 0:04:34.720 --> 0:04:37.920 when people started, you know, believing in Q and on 0:04:38.000 --> 0:04:42.880 and occupying the Capitol building and going nuts over bitcoin 0:04:42.960 --> 0:04:46.680 and game stop. So we'll we'll get to just about 0:04:46.760 --> 0:04:49.960 each and every one of those things. But it leads 0:04:50.000 --> 0:04:54.720 to an obvious question, how has the Internet changed the 0:04:54.760 --> 0:04:59.040 psychology of crowds? How has it affected how people respond 0:04:59.200 --> 0:05:02.880 to these men as delusions? Well, you can think of 0:05:03.000 --> 0:05:09.359 a mass delusion the same way you think of the pandemic. Uh. 0:05:09.400 --> 0:05:12.640 There is an agent, a causative agent. So in the 0:05:12.680 --> 0:05:15.320 case of the pandemic, it's the coronavirus. In the case 0:05:15.360 --> 0:05:19.159 of the Black Death, it was your seni epestus uh. 0:05:19.200 --> 0:05:22.839 And then there's a vector, and the vector for COVID 0:05:23.160 --> 0:05:27.920 is people uh, coughing and springing each other with droplets. Uh. 0:05:27.960 --> 0:05:31.640 And with the Black Death it was you know, fleas 0:05:31.680 --> 0:05:36.120 and rats transmitting the disease across great distances. What's the 0:05:36.200 --> 0:05:39.839 same thing. It's the same way with UH. With delusions, 0:05:39.880 --> 0:05:43.159 the the agent is the narrative UH. And the more 0:05:43.200 --> 0:05:47.520 compelling the narrative, the more virulent, the more dangerous the agent. 0:05:47.960 --> 0:05:50.480 And then you've got the vector UH. And the vector 0:05:50.600 --> 0:05:55.279 is the medium through which the delusion spreads. UH. And 0:05:55.480 --> 0:05:58.159 what we saw over the past ten years of the 0:05:58.200 --> 0:06:02.080 evolution in the explosion of social media UH. And so 0:06:02.160 --> 0:06:05.000 that is one of the most powerful vectors of delusions 0:06:05.000 --> 0:06:07.880 that we've ever we've ever seen. And it's kind of 0:06:07.920 --> 0:06:09.880 like we've gone, you know, in the in the days 0:06:09.920 --> 0:06:13.080 of the old media, from being you know, widely separated 0:06:13.120 --> 0:06:16.760 people who are infected UH. And we've gone now into 0:06:16.839 --> 0:06:19.520 a world where everybody's in the same small, aerless room 0:06:19.560 --> 0:06:22.560 and they're coughing on each other. So let's stay with 0:06:22.640 --> 0:06:25.400 the idea of narrative. M One of the things you 0:06:25.680 --> 0:06:30.279 refer to is that human beings are cognitive misers, and 0:06:30.320 --> 0:06:35.560 according to psychologists, we much prefer mental shortcuts and heuristics 0:06:35.880 --> 0:06:40.040 and a compelling narrative. What is the role of narratives 0:06:40.320 --> 0:06:45.000 in these manias? Well, the narrative is the causative agent. Okay, 0:06:45.120 --> 0:06:48.159 you can think of the narrative as being viral to 0:06:48.240 --> 0:06:53.080 the extent that it's compelling. And what psychologists have found 0:06:53.600 --> 0:06:57.320 is that the more compelling a narrative is, the more 0:06:57.360 --> 0:07:03.800 corrosive it is to our cognitive ability, in our analytical ability. Uh. 0:07:03.839 --> 0:07:06.360 And so you know what I did in the book 0:07:06.400 --> 0:07:12.000 was I identified the most compelling narratives that we're exposed to. 0:07:12.080 --> 0:07:14.480 And the one, of course, it's most financially afflictable, as 0:07:14.520 --> 0:07:18.840 a narrative that you can become effortlessly rich just by 0:07:19.080 --> 0:07:22.400 going online and clicking a few keys and there's almost 0:07:22.400 --> 0:07:25.040 no every involved. That's a very pleasing and a very 0:07:25.080 --> 0:07:30.400 compelling narrative. The other narrative that I examined a great 0:07:30.480 --> 0:07:34.080 length in the book is the most compelling religious narrative 0:07:34.120 --> 0:07:35.600 out there, which is the one that the world is 0:07:35.640 --> 0:07:38.520 going to end very quickly, which it turns out is 0:07:38.520 --> 0:07:42.240 far more prevalent than most people in your in my bubble, 0:07:42.880 --> 0:07:45.840 uh think that it is. So let's stay with that 0:07:45.880 --> 0:07:51.880 because there's some really fascinating combinations of apocalyptic end times 0:07:51.960 --> 0:07:55.920 and investment mania. One of the things I've found about 0:07:56.000 --> 0:08:01.640 the hardcore goldbugs as well as the hyper inflationists is 0:08:02.200 --> 0:08:05.720 that overlap between Hey, when it hits the fan and 0:08:05.760 --> 0:08:08.760 it all goes down. You better have some gold coins 0:08:08.760 --> 0:08:12.040 because that paper money will be worthless. That seems to 0:08:12.160 --> 0:08:18.040 really combine the religious armageddon with the financial armageddon. Yeah, 0:08:18.080 --> 0:08:21.440 and you can throw into that conspiracy theories. Uh. You know. 0:08:21.520 --> 0:08:26.040 Social psychologists have found that the two biggest correlates of 0:08:26.280 --> 0:08:29.520 conspiracy theories are a belief in the end times, that 0:08:29.680 --> 0:08:33.000 is the theological the religious end times. Uh. And the 0:08:33.040 --> 0:08:37.520 other characteristic that it correlates with is manichey and thinking. 0:08:37.520 --> 0:08:41.600 I believe that the world is divided into black and white, 0:08:41.640 --> 0:08:45.240 good people and bad people with nothing in between the 0:08:45.280 --> 0:08:48.600 maniche and personality. Could people never do bad things and 0:08:48.760 --> 0:08:50.800 bad people never do good things, even though we know 0:08:50.880 --> 0:08:54.080 that happens all the time. Yeah, that binary approach to 0:08:54.240 --> 0:08:58.120 reality seems to be a gross over simplification, and it 0:08:58.520 --> 0:09:02.760 certainly doesn't work for investing. I can't imagine it works 0:09:02.800 --> 0:09:06.240 in day to day life, although people certainly seem to 0:09:06.240 --> 0:09:12.719 be functioning despite holding some pretty insane beliefs. Yeah, absolutely, 0:09:12.760 --> 0:09:15.160 I mean you're right. Occasionally, you know, Jim Kramer gets 0:09:15.160 --> 0:09:20.160 things right. So Kramer is an interesting example because he 0:09:20.320 --> 0:09:25.240 leads um a group of followers. Uh. You could say 0:09:25.280 --> 0:09:28.240 the same thing about barstool sports. You could say the 0:09:28.280 --> 0:09:33.160 same thing about a number of different either financial or 0:09:33.160 --> 0:09:37.280 religious movements. But when we look at either Robin Hood 0:09:37.440 --> 0:09:41.160 or or read It's Wall Street Bets, there are no 0:09:41.679 --> 0:09:45.040 leaders there. There are no proselytizers there. Can you have 0:09:45.200 --> 0:09:48.280 a mob with no leader? I think there's something like 0:09:48.320 --> 0:09:52.000 ten million people follow Wall Street Bets, but no one 0:09:52.080 --> 0:09:55.480 person controls that group. Oh, absolutely, that's the way it 0:09:55.520 --> 0:09:58.840 happened most of the time. Uh. You know, when someone 0:09:58.880 --> 0:10:02.000 goes up on a lead and threatens to jump and 0:10:02.559 --> 0:10:07.280 a crowd gathers below them, A small percentage of the time, 0:10:07.440 --> 0:10:10.319 maybe you know, a few percent, maybe five or ten 0:10:10.360 --> 0:10:13.080 percent of the time, people start shouting up for the 0:10:13.120 --> 0:10:16.600 person to jump. All right, Uh, this is a one 0:10:16.600 --> 0:10:20.160 of the sad, you know, accouterments of human nature. Well, 0:10:20.200 --> 0:10:24.040 certainly there's no leader there, and it's it's certainly possible. 0:10:24.080 --> 0:10:27.200 In fact, I think that history shows that most math 0:10:27.280 --> 0:10:31.640 meanias really don't have an identifiable leader. Quite interesting. So 0:10:32.000 --> 0:10:35.199 there's some really fascinating quotes throughout the book I want 0:10:35.240 --> 0:10:39.360 to start with. More often than not, we avoid contrary 0:10:39.400 --> 0:10:43.720 facts and data when we cannot avoid them. Are erroneous assessments, 0:10:43.760 --> 0:10:49.160 will occasionally even harden them and yet more amazingly, make 0:10:49.280 --> 0:10:54.120 us more likely to proselytize them. This sounds very much 0:10:54.440 --> 0:10:58.440 like cognitive dissonance. Is how key a factor is that 0:10:58.679 --> 0:11:03.680 in both religious and financial decision making. Well, you said 0:11:03.679 --> 0:11:07.720 the magic the magic words uh. You know, cognitive difference 0:11:07.840 --> 0:11:09.959 was something that was written about and talked about by 0:11:10.040 --> 0:11:15.000 Leon Festinger, although he didn't invent the term uh and uh, 0:11:15.880 --> 0:11:19.080 it's you know, it's it's it's somewhat overdone, I think, 0:11:19.160 --> 0:11:22.760 especially in modern culture, but it's certainly still a fact that. 0:11:23.040 --> 0:11:27.280 Really what cognitive disfinance is about and confirmation bias is about, 0:11:27.440 --> 0:11:32.200 is it's not necessarily doubling down or reinforcing your beliefs 0:11:32.240 --> 0:11:35.400 when presented with contrary data, although that happens all the time, 0:11:35.679 --> 0:11:39.840 but it's more the avoidance of inconvenient uh facts and 0:11:39.960 --> 0:11:42.600 things that this confirm your theory. And to give you 0:11:42.640 --> 0:11:45.120 an example, there are people out there who believe that 0:11:45.160 --> 0:11:48.280 the Bible is perfectly prophetic, and there are a lot 0:11:48.280 --> 0:11:51.840 of very prophetic things in the Bible, things that came true, 0:11:52.320 --> 0:11:54.400 But there are a lot more things with the Bible 0:11:54.520 --> 0:11:58.640 prophesieses that didn't come true, and those get conveniently ignored 0:11:58.880 --> 0:12:02.280 by religious fundamental with So you mentioned in the book 0:12:02.520 --> 0:12:08.040 State of Balance that let's say you're not a Trump supporter, 0:12:08.160 --> 0:12:10.320 but a good friend of yours is a Trump supporter. 0:12:11.240 --> 0:12:17.000 That creates an inherent tention that not just the political debate, 0:12:17.600 --> 0:12:21.000 but the ability to reconcile. Hey, here's a person I like, 0:12:21.920 --> 0:12:24.920 but they have views I disagree with. How does that 0:12:25.000 --> 0:12:28.439 state of balance get reconciled in a brain? And I 0:12:28.480 --> 0:12:31.240 don't know if that's the best example from the book, 0:12:31.320 --> 0:12:35.920 but just that concept of being able to manage two 0:12:35.960 --> 0:12:40.800 inconsistent beliefs at the same time. Well, what you're talking 0:12:40.840 --> 0:12:44.280 about is a concept that was written about in by 0:12:44.280 --> 0:12:46.880 a psychologist by the name of the Fritz Tighter, and 0:12:46.880 --> 0:12:50.319 it's an important concept because it explains a lot. So 0:12:50.360 --> 0:12:52.160 I'll spend just a little bit of time on it, 0:12:52.480 --> 0:12:56.840 which is that of the balanced state. So let's say 0:12:56.840 --> 0:13:01.000 that you're, you know, a Trump supporter, okay, uh, and 0:13:01.679 --> 0:13:04.040 you meet someone and they're a Trump supporter and you 0:13:04.080 --> 0:13:06.520 really like the person, all right, then you're in a 0:13:06.559 --> 0:13:10.600 balanced state. All right. Now, if you meet someone who 0:13:10.640 --> 0:13:14.280 thinks that Donald Trump is Satan incarnate and you think 0:13:14.320 --> 0:13:16.800 that that person is a charcoal head, then you're in 0:13:16.840 --> 0:13:19.640 a balance state too, because it enables you to dismiss 0:13:19.840 --> 0:13:23.520 his or her opinion. But on the other hand, if 0:13:24.040 --> 0:13:26.640 you're a Trump supporter and you disagree with your very 0:13:26.679 --> 0:13:30.440 best friend about it about Donald Trump, then you're in 0:13:30.520 --> 0:13:33.000 an unbalanced state and you have to resolve that you 0:13:33.080 --> 0:13:36.400 have to or either have to decide that Donald Trump 0:13:36.480 --> 0:13:38.839 isn't so good, or you have to decide that you 0:13:38.880 --> 0:13:41.000 don't like your friends so much anymore, which is much 0:13:41.000 --> 0:13:44.920 more likely to happen because people find it easier to 0:13:44.960 --> 0:13:50.680 lose their friends than to completely obliterate their their belief system. Uh. 0:13:50.720 --> 0:13:55.040 And so you can actually do functional magnetic resonance imaging 0:13:55.240 --> 0:13:57.280 and you can see these two mechanisms at work. You 0:13:57.280 --> 0:13:59.640 can see certain areas of the brain lighting up when 0:13:59.679 --> 0:14:02.760 you're in a balanced state, and you can see certain 0:14:02.760 --> 0:14:06.160 other areas of the brain light up when you're in 0:14:06.160 --> 0:14:08.719 an unbalanced state, and then when that gets resolved, you 0:14:08.760 --> 0:14:11.400 see other areas of the brain light up. So when 0:14:11.440 --> 0:14:16.199 we hear about family members having disputes with other family 0:14:16.240 --> 0:14:20.280 members over Q and on and people literally being cut 0:14:20.320 --> 0:14:24.040 off by their parents and others who have fallen prey 0:14:24.120 --> 0:14:27.640 to do we call it a cult or a belief system. 0:14:28.640 --> 0:14:33.560 Is that balanced state issue? What's underlying that schism with 0:14:33.720 --> 0:14:38.160 even within families? Yes, uh to to to to get 0:14:38.560 --> 0:14:41.200 to bring in a four bit term, that's the classic 0:14:41.280 --> 0:14:45.360 Hiberian unbalanced state and it has to be resolved one 0:14:45.360 --> 0:14:47.120 way or the other. And the way most people resolved 0:14:47.200 --> 0:14:49.960 if they cut themselves off from people who they have 0:14:50.040 --> 0:14:55.640 strong political uh disagreements with. Quite interesting. Let's move towards uh, 0:14:55.840 --> 0:14:59.240 fear and greed. Those are the phrases I've always heard 0:14:59.720 --> 0:15:03.880 in finance. But if we want to get more specific 0:15:04.080 --> 0:15:08.000 that when we look at the limbic system, you discuss 0:15:08.120 --> 0:15:11.960 more precisely, I'm gonna I'm gonna mangle this the nuclei, 0:15:12.000 --> 0:15:18.560 accumbents and the amygdala. How important is the limbic system 0:15:18.600 --> 0:15:23.600 to our financial behavior? Well, it's almost everything. Uh. And 0:15:24.040 --> 0:15:26.960 you know to the extent that you succeed in finance, 0:15:27.400 --> 0:15:30.760 you succeed in finance to the extent that you can 0:15:30.800 --> 0:15:35.000 suppress the Limbic system, your system one, which is the 0:15:35.120 --> 0:15:38.480 very fast moving emotional system that we have. If you 0:15:38.520 --> 0:15:43.560 can't suppress that, you're probably going to die poor. That's interesting. 0:15:43.600 --> 0:15:49.200 I have a few more specific questions from the neurology perspective, 0:15:49.800 --> 0:15:54.600 also from the perspective of evolutionary history. You reference a 0:15:54.720 --> 0:16:01.800 preference for quote rationalization over rationality. Whatever luctionary purpose does 0:16:01.880 --> 0:16:06.560 that serve well? In a state of nature, you have 0:16:06.800 --> 0:16:10.400 to react very quickly. If you see, you know, black 0:16:10.400 --> 0:16:12.960 and yellow stripes in your peripheral vision, or you hear 0:16:13.000 --> 0:16:15.000 the history the stake, you would better move and better 0:16:15.040 --> 0:16:19.120 move quickly. Uh. And that leads to a number of things. 0:16:19.200 --> 0:16:22.040 But number one is the dominance of your fast moving 0:16:22.080 --> 0:16:25.600 limbic system. The limbic system is the fastest moving uh, 0:16:25.760 --> 0:16:28.640 central structure that you that you have, at least you 0:16:28.680 --> 0:16:32.000 know in your brain it is UH. And you know 0:16:32.000 --> 0:16:35.760 the central nervous system extends below the brain, but that's 0:16:35.520 --> 0:16:39.440 been getting too much in the weeds. Uh, And so 0:16:40.040 --> 0:16:43.960 evolutionarily it's got real survival value. But it also leads 0:16:44.000 --> 0:16:49.440 to something else, which is patternization. Okay, seeing patterns uh 0:16:49.560 --> 0:16:53.760 that really aren't there, because there's relatively little penalty for 0:16:53.880 --> 0:16:55.720 doing that. If you if you if you think you 0:16:55.760 --> 0:16:58.320 see yellow and black black stripes and your periphle vision 0:16:58.320 --> 0:17:00.680 and you jump but it's really not a tiger, it's 0:17:00.800 --> 0:17:03.840 something else. You haven't lost much. But if you under 0:17:03.880 --> 0:17:07.120 interpret the black and yellow stripes, then you're then you're lunch. 0:17:08.080 --> 0:17:12.639 So false positive evolutionary drive that let neat leave us 0:17:12.640 --> 0:17:15.639 to over interpret things. And the analogy I think that's 0:17:15.680 --> 0:17:18.240 that's best is that you know, if you're a skunk, 0:17:18.520 --> 0:17:20.680 millions of years of evolution have told you that when 0:17:20.720 --> 0:17:24.080 you need a large predator, you turn a hundred maybe degrees, 0:17:24.119 --> 0:17:27.840 lift your tail and spread uh. And that's you know, 0:17:28.000 --> 0:17:30.840 very very functional and very useful in a state of nature. 0:17:31.280 --> 0:17:33.960 But in a semi urban environment where the biggest threat 0:17:34.200 --> 0:17:36.520 to your existence is a hunk of steel weighing two 0:17:36.560 --> 0:17:42.679 tons moving at sixty that is not a functional response. 0:17:42.920 --> 0:17:46.320 And unfortunately that's the world we live in today. So 0:17:46.520 --> 0:17:51.200 false positives carry no cost, but false negatives are really 0:17:51.240 --> 0:17:55.720 significant from an evolutionary perspective, From an evolution yeah, but 0:17:55.800 --> 0:17:58.960 today it's the other way around. Today, the false positives 0:17:59.000 --> 0:18:02.439 that we're that we're proned to have a very high cost. 0:18:02.920 --> 0:18:06.720 So let's stay with that theme. Humans attend to bad 0:18:06.800 --> 0:18:11.240 news much more strongly than good news. We focus on 0:18:11.440 --> 0:18:17.000 negative outcomes. What's the genetic advantage of being more biased 0:18:17.400 --> 0:18:21.199 to spotting bad news than good news. Well, again, it's 0:18:21.240 --> 0:18:25.000 got obvious survival value in the first place. It's something 0:18:25.000 --> 0:18:27.560 that's almost so obvious that we never we never talked 0:18:27.560 --> 0:18:31.200 about it. Uh, you know, I mean things generally getting 0:18:31.200 --> 0:18:33.720 better is not what makes it to the headlines, all right, 0:18:35.560 --> 0:18:37.359 So we don't attend to good news as much as 0:18:37.359 --> 0:18:39.800 we attend to bad news. And in a state of nature, 0:18:39.880 --> 0:18:44.040 once again, it had obvious, uh survival value. One of 0:18:44.040 --> 0:18:48.399 the questions I get asked as as a doctor or 0:18:48.400 --> 0:18:50.600 good get asked as a doctor. And people who still 0:18:50.640 --> 0:18:52.520 ask me that this question is you know, when I 0:18:52.640 --> 0:18:55.640 was uh five year you know, I was ten years old, 0:18:55.720 --> 0:19:00.359 I I ate uh some some some Chinese food, and 0:19:00.359 --> 0:19:02.199 I got hardly sick and sick. And I've not been 0:19:02.240 --> 0:19:04.760 able to look at Chinese fude ever since. Why is 0:19:04.840 --> 0:19:07.600 that I can't? I can't get past it? And the 0:19:07.640 --> 0:19:09.639 answer is very simple. It's in a state of nature, 0:19:09.680 --> 0:19:13.360 you ate a certain mushroom and it made you sick, uh, 0:19:13.760 --> 0:19:15.920 never wanting to have that mushroom again. It was a 0:19:16.000 --> 0:19:20.919 very useful response. Interesting, So I love the quote you 0:19:21.280 --> 0:19:25.720 used from Charles Kindleberger there's nothing so disturbing to one's 0:19:25.760 --> 0:19:29.000 well being in judgment as to see a friend get rich. 0:19:29.600 --> 0:19:32.080 Why is that break that down from us? For us, 0:19:32.600 --> 0:19:38.080 wouldn't somebody in your tribe getting rich help your own 0:19:38.320 --> 0:19:44.040 survival prospects from a historical basis? Well, what would be? 0:19:44.280 --> 0:19:46.520 You know what my book really is is it's really 0:19:46.520 --> 0:19:51.240 a meditation on human nature. So we've already discussed the 0:19:51.280 --> 0:19:55.359 fact that, you know, man is the ape to tell stories. Uh. 0:19:56.440 --> 0:19:58.520 The foremost thing, which we haven't talked about yet, as 0:19:58.600 --> 0:20:02.240 man is the ape it imitates. But the third most 0:20:02.280 --> 0:20:06.280 important characteristic of human nature I talk about is man 0:20:06.359 --> 0:20:10.600 is the ape that seeks status. Uh. Why do we 0:20:10.640 --> 0:20:14.120 seek status? Well, because it helps us pass on our 0:20:14.240 --> 0:20:17.000 d n A, particularly if you're a male, uh. You 0:20:17.040 --> 0:20:21.679 know it's it's why rock stars uh and and athletes 0:20:21.720 --> 0:20:24.120 do so well with with women, because in a state 0:20:24.119 --> 0:20:26.679 of nature, if you're good at telling stories, or if 0:20:26.720 --> 0:20:30.760 you're good at hunting animals, uh, you can support meats. 0:20:30.800 --> 0:20:33.560 So it's the same thing. It's it's it's a very 0:20:33.600 --> 0:20:37.359 it's a very basic part of sexual selection. We seek 0:20:37.400 --> 0:20:39.479 status so he can pass on our d n A. 0:20:40.440 --> 0:20:44.760 Quite interesting, So let's talk about some of the parallels 0:20:44.800 --> 0:20:49.399 between religious zealotry and financial mania. If we were to 0:20:49.480 --> 0:20:54.320 think about how social epidemics like financial bubbles and and 0:20:54.720 --> 0:21:00.480 violent end time apocalyptic perspectives originate and p up a gate, 0:21:01.240 --> 0:21:08.200 why is there such parallels between finance and religion because 0:21:08.560 --> 0:21:14.520 they basically involved pretty much the same the same draws. Uh. 0:21:14.920 --> 0:21:19.840 You know, I've talked about how compelling financial narratives can 0:21:20.040 --> 0:21:23.440 sweep people up in its ambit and the same thing 0:21:23.480 --> 0:21:28.200 happens with compelling religious narratives. Now, if we want to 0:21:28.240 --> 0:21:31.199 look at you know, compelling narratives, and we want to 0:21:31.240 --> 0:21:34.400 go at the rubric of bad is more compelling than 0:21:34.440 --> 0:21:37.440 good or bad is stronger than good, then the most 0:21:37.440 --> 0:21:39.720 compelling narrative in the all the world has to be 0:21:39.760 --> 0:21:42.560 the one in which the world ends uh in a 0:21:42.640 --> 0:21:46.240 in a fiery inferno. Uh. And so that's the compelling 0:21:46.320 --> 0:21:49.520 narrative that really gets people's attention. And then to bring 0:21:49.560 --> 0:21:53.880 the status part of it in, uh. You know, if 0:21:53.880 --> 0:21:55.680 the world is going to end in fiery in a 0:21:56.040 --> 0:22:00.600 fiery inferno, then what more pleasing outcome than if you're 0:22:00.640 --> 0:22:04.439 able to avoid it because you and your friends are developed. 0:22:04.760 --> 0:22:09.160 So that speaks to our desire to acquire both status 0:22:09.160 --> 0:22:12.119 and you know, the financial narratives, You're going to become 0:22:12.160 --> 0:22:16.280 effortlessly rich, that's very pleasing. The religious narrative is that 0:22:16.359 --> 0:22:18.440 the world everybody is going to go to hell except 0:22:18.480 --> 0:22:21.760 repeat you and people who believe like you. And it's 0:22:21.840 --> 0:22:24.720 it's very pleasing. It gives you and you're in group status. 0:22:24.800 --> 0:22:28.399 So on. A very related quote from the book, quote 0:22:28.400 --> 0:22:32.639 immersion and narrative brings about isolation from the facts of 0:22:32.680 --> 0:22:38.040 the real world end quote. How significant is that separation 0:22:38.240 --> 0:22:42.200 from real world facts, both in finance and in religion, 0:22:42.880 --> 0:22:47.600 and what happens when people are confronted with the truth 0:22:47.880 --> 0:22:51.879 of their disconnect from real world facts. Well, in finance, 0:22:52.000 --> 0:22:54.760 that's one of the ways that you identify a mania 0:22:55.040 --> 0:22:58.040 or a bubble. It's one of the characteristics which is 0:22:58.200 --> 0:23:02.119 when you disconfirmed, when you get the disconfirming opinion to 0:23:02.200 --> 0:23:05.159 someone who is in the grips of a financial mania, 0:23:05.240 --> 0:23:08.640 this delusion that they're going to become effortlessly rich. Uh, 0:23:08.680 --> 0:23:11.880 they pushed back and they get very angry. Uh. And 0:23:12.000 --> 0:23:14.920 I don't know if you this happened to you, what 0:23:15.280 --> 0:23:17.280 you were doing, you know, back in the late nineties. 0:23:17.720 --> 0:23:20.879 But I was still in middle age back then, and 0:23:20.960 --> 0:23:24.560 when I would express skepticism about the Internet bubble, people 0:23:24.640 --> 0:23:26.959 just didn't disagree with me. They got angry at me. 0:23:27.280 --> 0:23:29.160 They told me I just didn't get it. They told 0:23:29.200 --> 0:23:31.600 me I was an idiot, and one or two, uh, 0:23:31.720 --> 0:23:36.240 people made dispersions about my my parenthood. Uh. They don't 0:23:36.280 --> 0:23:39.040 like that at all. And that was an experience that 0:23:39.080 --> 0:23:41.360 a lot of people had. And it's the same thing 0:23:41.359 --> 0:23:44.640 obviously with with religions. Why you don't argue with people 0:23:44.680 --> 0:23:47.879 ever about religion. You don't want to even think about 0:23:47.880 --> 0:23:51.240 disconfirming their their religious beliefs. So I had a very 0:23:51.280 --> 0:23:54.119 similar experience leading up to the O eight oh nine 0:23:55.000 --> 0:23:59.320 financial crisis. I was barish on stocks, real estate derivatives, 0:23:59.760 --> 0:24:03.600 and in the beginning, people just laughed. There was just 0:24:03.720 --> 0:24:07.280 complete and total you know, you're out of your mind. 0:24:07.640 --> 0:24:11.520 But it was only a little later that it became anger. 0:24:11.720 --> 0:24:15.680 And then once it turned out, I got lucky. Nobody 0:24:15.720 --> 0:24:18.359 wanted to talk about it and everybody was seemed to 0:24:18.359 --> 0:24:22.359 be convinced that they saw it coming. Also, Yeah, my 0:24:22.480 --> 0:24:25.840 favorite example of that was, you know, in summer around 0:24:25.840 --> 0:24:29.880 oh six four seven, I was listening to Bob Schiller 0:24:30.200 --> 0:24:34.119 be interviewed by somebody about the real estate bubble that 0:24:34.240 --> 0:24:37.640 was still evolving at that point, and he was being 0:24:37.640 --> 0:24:41.080 interviewed alongside of someone from you know, the National Association 0:24:41.119 --> 0:24:45.680 of Realities. Uh, And she wasn't having any any part 0:24:45.680 --> 0:24:48.760 of it. And finally she got so frustrated with Professor 0:24:48.800 --> 0:24:51.720 Schiller that she stopped and said, Professor Schiller, I don't 0:24:51.760 --> 0:24:54.359 know who you think you are, but you don't know 0:24:54.400 --> 0:24:59.720 the first thing about real estate. That's hilarious Nobel Prize 0:24:59.760 --> 0:25:03.080 to So he has another quote from the another quote 0:25:03.080 --> 0:25:05.840 from the book that I like religious manias tend to 0:25:05.880 --> 0:25:10.040 play out in the worst of times, during which mankind 0:25:10.160 --> 0:25:14.119 desires delivery from its troubles and a return to the 0:25:14.200 --> 0:25:17.680 quote unquote good old days. So what is it about 0:25:17.760 --> 0:25:21.800 the good old days that seems so compelling to people? 0:25:22.960 --> 0:25:26.520 I don't know the answer to that, but it is 0:25:26.640 --> 0:25:32.600 a constant, near constant feature of human nature to believe 0:25:33.240 --> 0:25:36.040 that things were always better a generation or two or 0:25:36.080 --> 0:25:42.440 three generations ago, when it's manifestly not the that's manifestly 0:25:42.480 --> 0:25:44.040 not the case. And you can see it all the 0:25:44.080 --> 0:25:47.440 way back to the dawn of literacy. I mean, one 0:25:47.440 --> 0:25:51.399 of the first archaic Greek Hellas was fellow named Hesiod 0:25:51.480 --> 0:25:54.240