Refutations of mass psychology theories?

I keep running into economic theories that are built around or rely solely on mass psychology. For example, most people I meet are convinced that the looming downturn in Finland is solely the product of people and the media talking about the downturn. The more refined versions have a little paradox of thrift thrown in, but most people just think if no one talked about the downturn, there would be no downturn. Also, the recent oil speculation theory seems to rely on mass psychology and I also ran into an article on US deindustrialization being the result of managers following "fads" and "trends" that led them to not invest in production.

So I was wondering if anyone knows of a good refutation to using these kinds of theories?

Wouldn't the best way be to ask them what of the real factors in the economy? Surely, rumours, expectations &c. do play a role and can lead to self-fulfilling prophecies, but they can only exacerbate an already existing problem. If the funds for investment have dried up due to inadequate savings, no change in expectations about this will serve to save the economy from what is really going on. Those who think it's nothing more but expectations ought to prove their case and refute competing alternatives - where have they done either?

-Jon

Jon Irenicus:

Wouldn't the best way be to ask them what of the real factors in the economy? Surely, rumours, expectations &c. do play a role and can lead to self-fulfilling prophecies, but they can only exacerbate an already existing problem.

That is usually my response, but it only elicits a "I don't know what planet you live on, but in the real world people follow trends" type of counter-argument (if you can call that an argument). And honestly, it has me stumped. It's so simplistic that it's almost a dead-end and most arguments I give to it merely lead back to the same "real world people follow trends". So I was hoping someone smarter than me has debunked this kind of thinking, since it seems to be the leading economic fallacy.

Libertas est Veritas:

That is usually my response, but it only elicits a "I don't know what planet you live on, but in the real world people follow trends" type of counter-argument (if you can call that an argument). And honestly, it has me stumped. It's so simplistic that it's almost a dead-end and most arguments I give to it merely lead back to the same "real world people follow trends". So I was hoping someone smarter than me has debunked this kind of thinking, since it seems to be the leading economic fallacy.

Of course most people do follow trends in their actions and all people are somehow affected by it. I do however not see how this is going to determine the final situation in the economy. Monetary policies, favorable institutions, business culture, natural circumstances and the like do play a far bigger role.

What do you actually mean by mass theories? What you mentioned sounds like the "positive thinking cult" just in reverse.

Can you mention any theorist that had to say something on mass psychology.

 

 

 

I haven't debunked it, I just side-step it.

Give them one or two facts.  Pure and simple facts about what is happening economically, and that justifies the current panic and concern.

I usually like to finish with, "most people can't grasp or are unaware of the finer points of what I just told you, so they might be reacting to something they don't completely understand, but instinctively, they can feel there is a problem."

My favorite analogy is that animals that come running through your campground because the forest is on fire, don't need to know how the fire started, to know they should run for their lives.

Like others have said, I guess the best approach is to just offer your own facts and arguments and sidestep theirs, which to be honest, are baseless assertions when taken alone.

-Jon

Just nail them on a logical fallacy (appeal to the majority or even mudslinging seem the most correct in this case ) and then offer your facts.  However yes, it would be best to include a relavant reason why their mass psychology theory is wrong after the unmasking of the fallacy.  Maybe you can square the circle by accepting the psychology theory and say that although what people think is important in what they will buy and how they will spend etc. this is still consistent with what I am about to say...(enter your argument here). 

Libertas est Veritas:

I keep running into economic theories that are built around or rely solely on mass psychology. For example, most people I meet are convinced that the looming downturn in Finland is solely the product of people and the media talking about the downturn. The more refined versions have a little paradox of thrift thrown in, but most people just think if no one talked about the downturn, there would be no downturn. Also, the recent oil speculation theory seems to rely on mass psychology and I also ran into an article on US deindustrialization being the result of managers following "fads" and "trends" that led them to not invest in production.

You have one case of mass speculation that is well known so it is claimed that all cases are the result of mass speculation.

You could always point out that the role of the entrepreneur is to go against the current trends in order to derive profits from untapped markets. This is pretty much an universally accepted rule unless you subscribe to some wacky theory that replaces the entrepreneur with some all knowing entity that guides the market from an ivory tower.

Also, the fact that people might follow trends doesn't say anything to the validity of said trends. Those who blindly follow are almost certain to lose out as can seen from Tulipmania or the current housing bust where people who bought at the peak are losing their shirts.

Without knowing the specifics of the arguments I would have to say they are trying to place the blame on some Red Herring instead of looking into the real issues involved. Yes some people might be following the trends (as I've heard of the current rise in the gold market) but that doesn't mean that all or even a majority are following the trends.

You get your paycheck and it doesn't go as far as it did before so you end up buying less, does this mean that you have decreased consumption because the media is talking about an economic downturn?

I think the only way to refute them is to either provide hard data to prove the underlying economic phenomena or to call them on their red herring and get them to prove the cause and effect relationship they are proposing. I would personally like to see proof that "real world people follow trends" is the rule and not the exception in the dog eat dog world of international business.

Libertas est Veritas:

I keep running into economic theories that are built around or rely solely on mass psychology. For example, most people I meet are convinced that the looming downturn in Finland is solely the product of people and the media talking about the downturn. The more refined versions have a little paradox of thrift thrown in, but most people just think if no one talked about the downturn, there would be no downturn. Also, the recent oil speculation theory seems to rely on mass psychology and I also ran into an article on US deindustrialization being the result of managers following "fads" and "trends" that led them to not invest in production.

So I was wondering if anyone knows of a good refutation to using these kinds of theories?

As Mises pointed out thinking something to happen won't; you need to buy and sell good to make changes. Thus a psychological explainiation needs to explain the actual buying and sale of goods; they do not. If it is the case that everyone is doing things wrong, which is highly unlikely, then why doesn't an entrepeneur realise this and invest it and thus reverse the trend. The only way to rule out this is to so that in this case entrepeneurs (properly understood which is essentially everyone) are always wrong. If that is the case ask them how you know they're correct. In essence pschological theories are deterministic and thus suffer from the inherent problem in all deterministic theories- the regression fallacy.

Most of this mass pschological behaviour is actually rational given the institutional structure. For example under fractional reserve banking it is rational to run reserves down lower and lower but it comes to the point that it is realised this does not represent real savings interest rates rise, the economy slows and bank runs take place- the Northern Rock escapade was entirely rational.

See Hulsmann's excellent General Theory of Error Cycles.

 

Libertas est Veritas:

Refutations of mass psychology theories?

So I was wondering if anyone knows of a good refutation to using these kinds of theories?

Those theories are pure lies and propaganda.  Instead of blaming the Federal Reserve for boom/bust cycles, "consumer confidence" is blamed.

Of course you're going to have no confidence when inflation and layoffs are stealing your wealth.

Oil speculation is entirely caused by money supply inflation.  Blaming other factors is a distraction.

Managers follow "fads" and "trends" because there's no true competition.  In a free market, if management followed the latest foolish trend, they would be bankrupted by their competitors.  In the present, there's no market penalty for incompetence.

It's ridiculous to say that if I'm more confident, then there will magically be more jobs.  On the other hand, the current economy is one big confidence/Ponzi scam, so maybe there's merit to the "psychology" theory.  If you're running a scam, it's important to keep people believing in it!

Most "bigger fool" investing is fueled by an inflationary monetary system, which from a calculation standpoint, can nearly always shows nominal gains.  Thus, if mass-psychology is a problem, mass-debasement of the common unit of value is a good way to cause such a problem.

The best way to refute this is to ask why bubbles don't grow forever.  How can confidence shift?  Is it based upon stock price history or earnings?  SOME people actually do research into their investments and know a good price from a bad one, even during a seemingly exponential price climb.

The ones who don't will most likely get burned.  Ask if people who got burned when the bubble busted will be heavily investing in the next bubble.  When people are held financially accountable for the risks they take and aren't deluded by nominal gains that don't match up to real gains, mass-psychology is not a problem.

Why do "mass-psychology" problems tend to occur around periods of massive credit expansion, government protection of over-extended banks, and under central banking?

 

Anonymous Coward:

You have one case of mass speculation that is well known so it is claimed that all cases are the result of mass speculation.

Even that isn't quite as clear cut as some think.

Anonymous Coward:

You could always point out that the role of the entrepreneur is to go against the current trends in order to derive profits from untapped markets.

I've tried to point that out, but sadly the argument requires a basic understanding of profit and time preference. Most uninitiated people seem to think profit is automatic and that an investor wants profit as soon as possible, even if it reduces long-term profits.

Oh, I found the deindustrialization article I mentioned earlier.