Subject Matter
The book was first published back in 1895 and while its over a 100 years old, just like the other classic boo on crowd behaviour Charles Mackey's Extraordinary Popular Delusions and Madness of Crowds, its gives us an insight into the behaviour of people when they group together When people group together reason goes out the window and emotions drive it as a group. We live in a world which is much more advanced than it was at the turn of the century but human nature never changes and that's why, Le Bon's work is so important in understanding human nature and of course we can apply it to the markets. Here is one of my favorite quotes from the book:
The Crowd and its Characteristics
“Whosoever be the individuals that compose it, however like or unlike be their make of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation.” (Gustav Le Bon 1897)
The herd instinct effects people of all intelligence levels and people from all walks of life. In the markets I have seen seriously intelligent people make judgements not based on logic or on reason but on wanting to be part of the crowd and the .com bubble is just one example. Where people simply bought stocks which were grossly overvalued and didn't question it until it was to late and we all know what happened at the end of the bubble:
"When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once"- (Gustav Le Bon)
Of course this always happens, as greed turns to fear and prices correct. The value of Le Bon's work is the fact that a crowd doesn't reason – its acts on instinct. As traders we can step away from the crowd and use our charts to see if a currency, stock or any other financial instrument is over valued and use our charts, to go against the herd when the time is right and make a profit.
"The mere fact that an individual forms part of a crowd, his intellectual standard is immediately and considerably lowered." (Gustav Le Bon)
This definetly applies to the Forex crowd. I was once at a seminar, when the speaker spoke about trading which was really a sales pitch for a Forex Robot. He claimed the robot make 1,000% per annum and offered it for sale ( just a one off price of $295) and a huge amount of people bought it! Some of the people where intelligent accounts, lawyers and they simply got caught up in the crowd and bought it would thinking that it was to good to be true.
Final Words
Many people discuss the Idea Le Bon wrote the book for political ends and he probably did but we are just looking at it, from the point of the crowd in a trading enviroment and for this purpose, it remains an essential book for Forex traders to read. Human nature hasn't changed in the 100 years since Le Bon wrote the book and will never change. If you understand, the mentality of the crowd and what drives it, you can make money from it.
