William J. Bernstein on Crowd Behavior (Podcast)

many to mention. I find Bill to be one of those really unique people who has a number of insights into the world of investing, partly because he's a neurologist and really spent a lot of time learning how people's brains function and what drives us in our decision making process.

But just as important, he's a historian and a deep researcher and author, and so not only does he understand the neurology and the cognitive science of our brains, but he is very familiar with all of the academic literature and all of the actual history of what's taken place over the past pick a timeframe five hundred, a thousand, two thousand years and so all of his work is always a deep dive. Every page is filled with so

much fascinating information. I'm really enjoying Delusions of Crowds. I'm about halfway through it. All of his books are absolutely essential reading to me. So if you are at all interested in anything from cognitive theory, behavioral finance, investing, anthropology, bubble behavior, bitcoin, in Tesla, you name it, you're gonna find this to be just a fascinating dive. So, with no further delay, my conversation with William Bernstein. This is

mesters in Business with very Renaults on Bloombern Radio. My extra special guest this week is William Bernstein. He began his career as a neurologist before becoming an author, financial theorist, and investment advisor. He's written a dozen books, the most recent of which is The Delusion of Crowds, Why People Go Mad in Groups. Who better to discuss people going insane than a neurologist investor William Bernstein, Welcome back to Bloomberg.

As always a pleasure, Barry. So let's dive right into this. But before you were an investor and an author, you worked as a medical doctor, with this specialty in neurology, How did that background help you as an investor? Really only in a very indirect way. You would think that being a clinical neurologist would help you with psychology uh and the neuropsychology, but really practicing neurology is a very

down and dirty, ground level occupation. Um. You know what I like to explain to people, uh, is that the great neuroscientists that we think of. Uh. You know, people like the Demasio's are like great artists, or Michelangelo's and da Vinci's. Or is what I did was more Sherwin Williams. It was met pain in back pain. Rather, what helped me write about finance is simply the scientific training and back of being a doctor. Uh. And you know the

importance of examining data, seeking it out and rigorously analyzing it. Interesting. So, so I mentioned to some colleagues that I was going to be speaking with you, and one of them, uh said to ask you. Michael Batnick said to ask you, when you started writing Why People Go Mad in Groups? Did you expect it to come out at a time when people were in fact going mad in groups? No?

This is the very definition of dumb. Luck. As it turns out, my publisher decided to delay bring the book out for about six months because they didn't want to bring it out right before the election, because they figured out would suck up too much of people's bandwidth. Uh. And so it got delayed until just at the moment when people started, you know, believing in Q and on and occupying the Capitol building and going nuts over bitcoin and game stop. So we'll we'll get to just about

each and every one of those things. But it leads to an obvious question, how has the Internet changed the psychology of crowds? How has it affected how people respond to these men as delusions? Well, you can think of a mass delusion the same way you think of the pandemic. Uh. There is an agent, a causative agent. So in the case of the pandemic, it's the coronavirus. In the case of the Black Death, it was your seni epestus uh. And then there's a vector, and the vector for COVID

is people uh, coughing and springing each other with droplets. Uh. And with the Black Death it was you know, fleas and rats transmitting the disease across great distances. What's the same thing. It's the same way with UH. With delusions, the the agent is the narrative UH. And the more compelling the narrative, the more virulent, the more dangerous the agent. And then you've got the vector UH. And the vector

is the medium through which the delusion spreads. UH. And what we saw over the past ten years of the evolution in the explosion of social media UH. And so that is one of the most powerful vectors of delusions that we've ever we've ever seen. And it's kind of like we've gone, you know, in the in the days of the old media, from being you know, widely separated people who are infected UH. And we've gone now into a world where everybody's in the same small, aerless room

and they're coughing on each other. So let's stay with the idea of narrative. M One of the things you refer to is that human beings are cognitive misers, and according to psychologists, we much prefer mental shortcuts and heuristics and a compelling narrative. What is the role of narratives in these manias? Well, the narrative is the causative agent. Okay, you can think of the narrative as being viral to

the extent that it's compelling. And what psychologists have found is that the more compelling a narrative is, the more corrosive it is to our cognitive ability, in our analytical ability. Uh. And so you know what I did in the book was I identified the most compelling narratives that we're exposed to. And the one, of course, it's most financially afflictable, as a narrative that you can become effortlessly rich just by going online and clicking a few keys and there's almost

no every involved. That's a very pleasing and a very compelling narrative. The other narrative that I examined a great length in the book is the most compelling religious narrative out there, which is the one that the world is going to end very quickly, which it turns out is far more prevalent than most people in your in my bubble, uh think that it is. So let's stay with that because there's some really fascinating combinations of apocalyptic end times

and investment mania. One of the things I've found about the hardcore goldbugs as well as the hyper inflationists is that overlap between Hey, when it hits the fan and it all goes down. You better have some gold coins because that paper money will be worthless. That seems to really combine the religious armageddon with the financial armageddon. Yeah, and you can throw into that conspiracy theories. Uh. You know.

Social psychologists have found that the two biggest correlates of conspiracy theories are a belief in the end times, that is the theological the religious end times. Uh. And the other characteristic that it correlates with is manichey and thinking. I believe that the world is divided into black and white, good people and bad people with nothing in between the maniche and personality. Could people never do bad things and bad people never do good things, even though we know

that happens all the time. Yeah, that binary approach to reality seems to be a gross over simplification, and it certainly doesn't work for investing. I can't imagine it works in day to day life, although people certainly seem to be functioning despite holding some pretty insane beliefs. Yeah, absolutely, I mean you're right. Occasionally, you know, Jim Kramer gets things right. So Kramer is an interesting example because he leads um a group of followers. Uh. You could say

the same thing about barstool sports. You could say the same thing about a number of different either financial or religious movements. But when we look at either Robin Hood or or read It's Wall Street Bets, there are no leaders there. There are no proselytizers there. Can you have a mob with no leader? I think there's something like ten million people follow Wall Street Bets, but no one person controls that group. Oh, absolutely, that's the way it

happened most of the time. Uh. You know, when someone goes up on a lead and threatens to jump and a crowd gathers below them, A small percentage of the time, maybe you know, a few percent, maybe five or ten percent of the time, people start shouting up for the person to jump. All right, Uh, this is a one of the sad, you know, accouterments of human nature. Well, certainly there's no leader there, and it's it's certainly possible. In fact, I think that history shows that most math

meanias really don't have an identifiable leader. Quite interesting. So there's some really fascinating quotes throughout the book I want to start with. More often than not, we avoid contrary facts and data when we cannot avoid them. Are erroneous assessments, will occasionally even harden them and yet more amazingly, make us more likely to proselytize them. This sounds very much like cognitive dissonance. Is how key a factor is that

in both religious and financial decision making. Well, you said the magic the magic words uh. You know, cognitive difference was something that was written about and talked about by Leon Festinger, although he didn't invent the term uh and uh, it's you know, it's it's it's somewhat overdone, I think, especially in modern culture, but it's certainly still a fact that.

Really what cognitive disfinance is about and confirmation bias is about, is it's not necessarily doubling down or reinforcing your beliefs when presented with contrary data, although that happens all the time, but it's more the avoidance of inconvenient uh facts and

things that this confirm your theory. And to give you an example, there are people out there who believe that the Bible is perfectly prophetic, and there are a lot of very prophetic things in the Bible, things that came true, But there are a lot more things with the Bible prophesieses that didn't come true, and those get conveniently ignored by religious fundamental with So you mentioned in the book State of Balance that let's say you're not a Trump supporter,

but a good friend of yours is a Trump supporter. That creates an inherent tention that not just the political debate, but the ability to reconcile. Hey, here's a person I like, but they have views I disagree with. How does that state of balance get reconciled in a brain? And I don't know if that's the best example from the book, but just that concept of being able to manage two

inconsistent beliefs at the same time. Well, what you're talking about is a concept that was written about in by a psychologist by the name of the Fritz Tighter, and it's an important concept because it explains a lot. So I'll spend just a little bit of time on it, which is that of the balanced state. So let's say that you're, you know, a Trump supporter, okay, uh, and you meet someone and they're a Trump supporter and you really like the person, all right, then you're in a

balanced state. All right. Now, if you meet someone who thinks that Donald Trump is Satan incarnate and you think that that person is a charcoal head, then you're in a balance state too, because it enables you to dismiss

his or her opinion. But on the other hand, if you're a Trump supporter and you disagree with your very best friend about it about Donald Trump, then you're in an unbalanced state and you have to resolve that you have to or either have to decide that Donald Trump isn't so good, or you have to decide that you don't like your friends so much anymore, which is much more likely to happen because people find it easier to

lose their friends than to completely obliterate their their belief system. Uh. And so you can actually do functional magnetic resonance imaging and you can see these two mechanisms at work. You can see certain areas of the brain lighting up when you're in a balanced state, and you can see certain other areas of the brain light up when you're in an unbalanced state, and then when that gets resolved, you

see other areas of the brain light up. So when we hear about family members having disputes with other family members over Q and on and people literally being cut off by their parents and others who have fallen prey to do we call it a cult or a belief system. Is that balanced state issue? What's underlying that schism with even within families? Yes, uh to to to to get to bring in a four bit term, that's the classic Hiberian unbalanced state and it has to be resolved one

way or the other. And the way most people resolved if they cut themselves off from people who they have strong political uh disagreements with. Quite interesting. Let's move towards uh, fear and greed. Those are the phrases I've always heard in finance. But if we want to get more specific that when we look at the limbic system, you discuss more precisely, I'm gonna I'm gonna mangle this the nuclei, accumbents and the amygdala. How important is the limbic system

to our financial behavior? Well, it's almost everything. Uh. And you know to the extent that you succeed in finance, you succeed in finance to the extent that you can suppress the Limbic system, your system one, which is the very fast moving emotional system that we have. If you can't suppress that, you're probably going to die poor. That's interesting. I have a few more specific questions from the neurology perspective, also from the perspective of evolutionary history. You reference a

preference for quote rationalization over rationality. Whatever luctionary purpose does that serve well? In a state of nature, you have to react very quickly. If you see, you know, black and yellow stripes in your peripheral vision, or you hear the history the stake, you would better move and better move quickly. Uh. And that leads to a number of things. But number one is the dominance of your fast moving

limbic system. The limbic system is the fastest moving uh, central structure that you that you have, at least you know in your brain it is UH. And you know the central nervous system extends below the brain, but that's been getting too much in the weeds. Uh, And so evolutionarily it's got real survival value. But it also leads to something else, which is patternization. Okay, seeing patterns uh that really aren't there, because there's relatively little penalty for

doing that. If you if you if you think you see yellow and black black stripes and your periphle vision and you jump but it's really not a tiger, it's something else. You haven't lost much. But if you under interpret the black and yellow stripes, then you're then you're lunch. So false positive evolutionary drive that let neat leave us

to over interpret things. And the analogy I think that's that's best is that you know, if you're a skunk, millions of years of evolution have told you that when you need a large predator, you turn a hundred maybe degrees, lift your tail and spread uh. And that's you know, very very functional and very useful in a state of nature. But in a semi urban environment where the biggest threat to your existence is a hunk of steel weighing two tons moving at sixty that is not a functional response.

And unfortunately that's the world we live in today. So false positives carry no cost, but false negatives are really significant from an evolutionary perspective, From an evolution yeah, but today it's the other way around. Today, the false positives that we're that we're proned to have a very high cost. So let's stay with that theme. Humans attend to bad news much more strongly than good news. We focus on negative outcomes. What's the genetic advantage of being more biased

to spotting bad news than good news. Well, again, it's got obvious survival value in the first place. It's something that's almost so obvious that we never we never talked about it. Uh, you know, I mean things generally getting better is not what makes it to the headlines, all right, So we don't attend to good news as much as we attend to bad news. And in a state of nature, once again, it had obvious, uh survival value. One of the questions I get asked as as a doctor or

good get asked as a doctor. And people who still ask me that this question is you know, when I was uh five year you know, I was ten years old, I I ate uh some some some Chinese food, and I got hardly sick and sick. And I've not been able to look at Chinese fude ever since. Why is that I can't? I can't get past it? And the answer is very simple. It's in a state of nature, you ate a certain mushroom and it made you sick, uh, never wanting to have that mushroom again. It was a

very useful response. Interesting, So I love the quote you used from Charles Kindleberger there's nothing so disturbing to one's well being in judgment as to see a friend get rich. Why is that break that down from us? For us, wouldn't somebody in your tribe getting rich help your own survival prospects from a historical basis? Well, what would be? You know what my book really is is it's really a meditation on human nature. So we've already discussed the

fact that, you know, man is the ape to tell stories. Uh. The foremost thing, which we haven't talked about yet, as man is the ape it imitates. But the third most important characteristic of human nature I talk about is man is the ape that seeks status. Uh. Why do we seek status? Well, because it helps us pass on our

d n A, particularly if you're a male, uh. You know it's it's why rock stars uh and and athletes do so well with with women, because in a state of nature, if you're good at telling stories, or if you're good at hunting animals, uh, you can support meats. So it's the same thing. It's it's it's a very it's a very basic part of sexual selection. We seek status so he can pass on our d n A. Quite interesting, So let's talk about some of the parallels

between religious zealotry and financial mania. If we were to think about how social epidemics like financial bubbles and and violent end time apocalyptic perspectives originate and p up a gate, why is there such parallels between finance and religion because they basically involved pretty much the same the same draws. Uh. You know, I've talked about how compelling financial narratives can sweep people up in its ambit and the same thing

happens with compelling religious narratives. Now, if we want to look at you know, compelling narratives, and we want to go at the rubric of bad is more compelling than good or bad is stronger than good, then the most compelling narrative in the all the world has to be the one in which the world ends uh in a in a fiery inferno. Uh. And so that's the compelling narrative that really gets people's attention. And then to bring

the status part of it in, uh. You know, if the world is going to end in fiery in a fiery inferno, then what more pleasing outcome than if you're able to avoid it because you and your friends are developed. So that speaks to our desire to acquire both status and you know, the financial narratives, You're going to become effortlessly rich, that's very pleasing. The religious narrative is that the world everybody is going to go to hell except repeat you and people who believe like you. And it's

it's very pleasing. It gives you and you're in group status. So on. A very related quote from the book, quote immersion and narrative brings about isolation from the facts of the real world end quote. How significant is that separation from real world facts, both in finance and in religion, and what happens when people are confronted with the truth of their disconnect from real world facts. Well, in finance, that's one of the ways that you identify a mania

or a bubble. It's one of the characteristics which is when you disconfirmed, when you get the disconfirming opinion to someone who is in the grips of a financial mania, this delusion that they're going to become effortlessly rich. Uh, they pushed back and they get very angry. Uh. And I don't know if you this happened to you, what you were doing, you know, back in the late nineties. But I was still in middle age back then, and when I would express skepticism about the Internet bubble, people

just didn't disagree with me. They got angry at me. They told me I just didn't get it. They told me I was an idiot, and one or two, uh, people made dispersions about my my parenthood. Uh. They don't like that at all. And that was an experience that a lot of people had. And it's the same thing obviously with with religions. Why you don't argue with people ever about religion. You don't want to even think about

disconfirming their their religious beliefs. So I had a very similar experience leading up to the O eight oh nine financial crisis. I was barish on stocks, real estate derivatives, and in the beginning, people just laughed. There was just complete and total you know, you're out of your mind. But it was only a little later that it became anger. And then once it turned out, I got lucky. Nobody wanted to talk about it and everybody was seemed to

be convinced that they saw it coming. Also, Yeah, my favorite example of that was, you know, in summer around oh six four seven, I was listening to Bob Schiller be interviewed by somebody about the real estate bubble that was still evolving at that point, and he was being interviewed alongside of someone from you know, the National Association of Realities. Uh, And she wasn't having any any part

of it. And finally she got so frustrated with Professor Schiller that she stopped and said, Professor Schiller, I don't know who you think you are, but you don't know the first thing about real estate. That's hilarious Nobel Prize to So he has another quote from the another quote from the book that I like religious manias tend to play out in the worst of times, during which mankind desires delivery from its troubles and a return to the

quote unquote good old days. So what is it about the good old days that seems so compelling to people? I don't know the answer to that, but it is a constant, near constant feature of human nature to believe that things were always better a generation or two or three generations ago, when it's manifestly not the that's manifestly not the case. And you can see it all the

way back to the dawn of literacy. I mean, one of the first archaic Greek Hellas was fellow named Hesiod who was no well known for a collection that he

wrote called Works some Days. Uh, and he talks about how, you know, four or five generations, there was a there was a generation of golden men who lived wonderful lives and were virtuous and we're prosperous, and then with each success of generation, things went went went to hell in a handbasket until you know, they were in the current generation when no one respected their elders and the world was corrupt and things were generally generally awful. Uh. It was,

you know, the origin of kids these days. Two areas where people tend to go mad our religion and money. And some people have talked about some current assets that have run up as combining the two. And I think you could look at bitcoin that way, you could look at Tesla that way. What are your thoughts on on those two particular assets. Well, I think certainly bitcoin is exhibits all the behavior of a bubble. Uh. You you see large groups of people who think that they're going

to become effortlessly rich investing in bitcoin. Uh. You see people quitting their jobs to trade it. Uh. You see uh anger directed at you when you express skepticism. My favorite bit of anger uh was uh John McAfee's famous statement that he would perform an act on himself that requires great spinal flexibility on national TV if it didn't hit a half a million dollars and then finally a date that's already passed right here, he lost that bad Yeah. Yeah,

so so you see that. Uh, you know, with with with, certainly with bitcoin. Now Tesla is a more difficult case. I mean, Tesla may actually wind up being a very successful uh company. Whether it will justify it it's evaluation is another story. There are other people in the world, you know, how to make electric vehicles besides figuring on a musk uh, And so it's not immediately clear that's what's going on. I don't see the kind of mania surrounding Tesla stock. What I see the mania surrounding is

the Tesla car, which is a different thing. Uh. The real passion that I see, but not the people love their Tesla stock. It's it's the the the evangelicism of people who love the Tesla cars. I'm going to take it a step further than that. I just had the Mustang Machee for a week to play with. And it's not even the cars, it's the software within the car.

Whenever I've discussed the Mustang with other Tesla owners, the comparing contrast is not the build quality or the design or some of the things that Ford does really well. It's the network of superchargers. It's the order over the air automatic updates, it's the self driving. It's all these software things that Tesla has created beyond the actual vehicle itself. It's kind of fascinating. Yeah, well, that's because you and I are older than dirt and we you know, of

a generation when cars were really really important. Uh you know, to young people, their their phones and the capability of their phones are much more important in the capability of their cars. So my generation, a car meant freedom. But the current generation, I don't think, feels the same way about escaping a small town as Bruce Springsteen did in in Born to Run. It's it's certainly a generational difference. So what's interesting to me. There's a lot of things

interesting to me about this book. But you discussed in the introduction on how Charles McKay was really the influence and the inspiration for this. So what motivated you to want to update the original work by Charles McKay about the Madness of crowds. Well, yeah, the I was uh a journalist who in eighteen four you and writes this book Memoirs of Extraordinarily Popular Delusions in the Madness of Crowds, And as you and I both well know, it's a

seminal book in finance. It's one of those books that you tell every practitioner at some point to read because it described the two great bubbles of the of the eighteenth century and also the supposed bubble that surrounded uh toolip bulbs in the seventeenth century, which turns out not to be as a society wide phenomenon is as mackay

made it out to be. But it's the most famous chapter in the book because he coins the word tool of mania uh and gives it to the to the English language, and so for generations after that the book has remained in print and has saved people's bacon. UH. Bernard Baruke famously read the book in n right before the crash in nineteen o seven and recognized the signs of the time, and he loved the book so much that he actually wrote the introduction to the nineteen thirty

two edition of the book. And of course I read the book in the mid nineteen nineties, just before the tech bubble started to really get going, and I thought it was vaguely interesting, was sort of like a bad B movie about the Roman Empire. It wasn't really relevant to the financial markets at the time, which were pretty

well behaved in retrospect. Uh. And then all of a sudden, before my very eyes, I saw this bubble blow, and you know, it saved my bacon the way it did probably most other people who had read the book, So

that sort of stayed in my memory banks. Uh. And then you know, five or six years ago, Uh, I observed the way everybody else did, the ability of the Islamic state to attract tens of thousands of people from around the world, uh, including from some a prosperous and secure Western nations, to go to one of the most dangerous and worst places on the world and to you know, to be make cases to to die or to become

seriously injured. And the way they did it, it turns out, was not by deploying this end Times narrative, which Mackay had also written about in in his book, and I realized at that point I had to update the book because you know, we now know a lot more about the neuropsychology of why these things occur, which mackay couldn't know because of the state of science at the time.

So I love this quote from Charles McKay quote, men, it has been said thinking herds, it will be seen that they go mad and herds while they only recover their senses more slowly and one by one. Why is that, Well, it's because this confirmation is is a solitary process. It's a process where you have to look inside yourself and say, my god, I was an idiot. Uh. And it's a very individual process, whereas the spreading of the media, the spreading of the virus of the contagion is is a

is a social process. So you mentioned social networks earlier, whether it's Facebook or Twitter, or or TikTok or what have you. Um, they seem to be accelerating both the creation of these memes and the way they're propagated. Do you think they're a key factor in some of these episodes, how quickly they seem to come out of nowhere, how big they blow up, And then what happens to them after the fact. Yes, I think that's that's absolutely true. A meania can spread more rapidly and more widely today

than it ever could before. The thing that's that's really interesting is that, you know, with each iteration, with each advance in communications technology, you have the potential for accelerating delusions. For example, it's no accident that uhs that I wrote about in the book were sixteenth century episodes that's followed hard on the heels of the invention of the printing press.

That wasn't an accident, all right, that we started to see, you know, several religious mass delusions in in in continental Europe starting around uh the year fifteen hundred or so. The really interesting thing is why we didn't see all that many manias with radio and television. And the answer was they had built in filters, all right. Uh you know,

serious journalistic ethics. Walter Cronkite and you know Edward R. Merrow tended not to lie to people, although Adolph Hitler did and he certainly spread a mass delusion, and he did it primarily with radio. That's interesting. You know, if you look at the book pop why bubbles are great

for the economy. Dan gross goes over every time a new technology comes out, if not a full blown bubble than just a massive land Russian over investment misdeployment of capital accompanied everything from railroads to radio, television, automobiles, even fiber optics. You end up with this giant investment because of a fear of missing the next big thing, and it usually ends up with a handful of winners, but most of the rest of the companies turn out to

be worthless. But it doesn't necessarily become a full blown bubble across all of society. Yeah, that is that is something that that's almost the constant of financial history. Is there are technologies that really changed the world. I mean, you know, um uh, the Internet really did change everything. Okay, it's just that it didn't make the average investor who invested in the tech companies of the late nineties wealthy.

The paradigm to that is something I write about in the book which is Global Crossing Gary Linno Sperm, which was, you know, a fiasco from a financial uh point of view. But the man did build, you know, a large percentage of the world's fiber optic capacity, and he didn't foresee two things, not that he should have at least one of which he should have foreseen, which was that you know, there would be competing lines UH laid that would cut

into his profits. But the other thing which he didn't perceive, and I don't think anyone really foresaw, was that the improvement in dry plant, that is, the relays and the transmitters and the receivers along the fiber aphic chains would improve so dramatically that a fiber, the capacity of a fiber to carry data UH would without changing the fiber at all, would improve by orders of magnitude without laying

any new fibers. So between I don't know about two thousand and two and two thousand and fifteen, there was almost no fiber new fiber laid UH and yet the capacity, the carrying capacity of the fiber up by about a thousandfold. That's amazing. Arguably, global crossing bandwidth capacity is responsible for everything from YouTube to Facebook that could not have existed in in the pre fat pipe days. Yeah, the concept that I talked about in the book is that technology

investors tend to be capitalism philanthropists. Okay, they tend to put money into vitally needed infrastructure that benefits society at large, but benefits all of us, whether it's the railroads, or radio or television or aircraft manufacturer. But they don't make any money in the process. They probably be better off, as the old joke goes, uh, throwing half the money

out the window and burning the other half. So I want to stick with the some of the eighteen century bubbles you write about, the south Sea bubble and the Mississippi Company bubble in Europe. One of the data points just stunned me of eighteenth century European stock issuance occurred in a single year, seventeen twenty. How on earth is that even possible. Well, we saw that that was an extreme example. I don't think we've seen anything quite like

it ever since. But certainly, you know, the the the amount of I p o issuance of of new sheriffs or in the new company births in the UH was was a very similar phenomenon and left us with some you know, companies that are very important today, prime among which is Amazon. No con intended to say the least. I also want to stick with the parallel you draw

from the south Sea Company and real estate. You mentioned the Sassy Company was worth twice the value of all of the lands in England, and we saw an echo of that in the nineteen eighties thanks to the Tokyo real estate bubble, when the Imperial Palace was worth more than all of the land in California. What is it about real estate that encourages this sort of interesting, bubblicious behavior. Well, you have to go back a step and ask what

are the factors that underlie bubbles? Uh? And the biggest factor of all, once you get past the new technology, is, of course, the availability of easy credit. So invariably you see bubbles in times of uh lowering gradually falling interest rates, which certainly has some relevance today. UH. And what happens is is the classic real estate bubble cycle, which is, you buy a piece of real estate, Uh, it appreciates and value that enables you to borrow more when you

collateralize it. UH. So you take that capital and you buy more real estate. Uh. The prices continue to rise, which enables you to borrow more and more. It becomes a self inflating cycle until it finally blows up. That's my favorite scene in the movie version of The Big Short, where Steve Carrell is talking to I don't remember for as a waitress or a stripper who owned a house and was talking about how she financed it, and uh, he asked her a question and her answer was, how

is this? He's like, you have more than one? She says, I have five, And it's just that classic moment of Oh, that's what people do with free money and lots of leverage. They go out and try and uh, try and get

rich as quickly as they can. Yeah. My favorite story, and I think it may have come from one of your episodes, was when Dick Sailor did beside that scene with two of the Jennifer Lopez uh, and it turned and it turned out that Jennifer Lopez didn't know who Dick Taylor was, and Dick Taylor didn't know who Jennifer Lopez was. Was it j Lower? Was it Selena Gomez? I don't remember, you know, I honestly don't know. Tells

you what generation I belong to. But the actress didn't know who who whose failure was advice A person I thought that was hilarious, to be fair, another person a decade before they won their Nobel prize. So you know, maybe maybe it was a you know to her just an obscure economics professor toiling and obscurity in Chicago. There there's a couple of really just fascinating digressions within the book. I love this, this reference to some of Barry Iken

Green's work. He's an authority on the gold standard, and his observation was that nations recovered from the Great Depression in the precise order they abandoned hard money and a currency backed by gold. I have never seen that precise quote. How significant was hard money and gold to the basic

narrative and the delusion that gold was somehow special. Well, in the first place, we get that to the the Paris bubble of Mississippi company UH bubble, And that was John Law's great innovation was he realized that hard money was a drag on any company's economy UH and financial development. And so he basically introduced paper currency UH to France, and unfortunately he went he went overboard. But he's probably you know, I think it's he's arguably the the father

of modern central banking and modern finance. He invented the system that we have today. Just that he you know, he and the Duke door Land or they all blew it blew it up, so I can Green is of course, you know, did the seminal research in this area. You're talking about a book called Golden Setters U and the research behind it. When you ever you hear the mainstream economist, uh, you know, gag when you mentioned the gold standard. Uh, it's Barry I can Green there channeling and and his work.

My favorite trope of the gold bug is that gold has been money for five thousand years. It certainly has not been money for five thousand years. The money, you know, it wasn't started to be used as money until the Hellenistic period. Uh in in Greece, which was not much more than two thousand years ago. And before that, lack of things were money. You know, a leader of grain

was money, ahead of cattle was money. Uh. If you wanted something that looked more like hard money back in the ancient world, silver was was the real hard money at that error, it wasn't gold. Yeah, it's going to be curious to see what happens to the goldbubs when

we um last. So some asteroid with you know, a billion metric tons of gold and platinum in it, it might change the belief and hard hard money There's another issue we really didn't get to, which is the overwhelming proclivity of human beings to imitate the behavior of of those around them, regardless of how baseless or self destructive that behavior. Maybe what's behind our propensity for imitation? Well, in the first place, we really haven't talked about this.

When you ask what is the primary uh psychological mechanism of manias, it's our proclivity to imitate U from something as basic as just yawning. It's why yawning is infectious. And the infectiousness of yawning is something that's actually been studied in some detail, and I won't get into how interesting it is, but trust me, yawning is is very

very interesting. But what is behind that is something that's that's very simple, and that's the paradigm of thinking of the human occupation of the New World North and South America, which began some around fifteen twenty thousand uh years ago, and within the space of several thousand years, human kind spread from the frozen Arctic wastes down through the North American continent and into South America and the Andy's and

all the way down to the Tierra del Fuego. And along the way human beings had to learn how to make kayaks uh and how to hunt bison and how to make poison blow darts, and all of those endeavors are very complex, they're very hard to learn, and no one person is going to figure out how to do it well on their own. And so the way that you will survive, in the way your tribe will survive,

is if you're very good at imitating. You know, if Joe and his friends figure out how to build a kayak from from scratched and rather than figure it out yourself, you're going to imitate that, all right. So the ability to imitate carries enormous sur value of value not only

for individuals, but for entire societies as well. And unfortunately, it's a good deal more dysfunctional uh in the in the modern world, because that ability to imitate carries with it the proclivity to nnias and the proclivity of nnias It may not be that dangerous in the in a state of nature, but in a world of social media, it's deadly interesting. So, you know, we we briefly touched on on some of the evolutionary adaptations that work so well on the Savannah, but hurt us um in modern times.

What is some of the anthropology behind this? Why are we simply status seeking, narrative believing imitators. Give us a little more background about some of the academic work that that's been done in this space. Well, the narrative proclivity is something that you think about. It is fairly obvious, which is that when you and your your colleagues fifteen thousand years ago went out to hunt wily wily mammoth, you didn't issue mathematical vectors to each other. That's not

the way the human mind works. We use We use our left hemisphere seric ability to communicate with words. So you know, Joe, you go left, Fred you go right, and you'll both spear the mathodon from both sides. That's that's how we communicate with each other UH. And that's how we transmit our values. We don't do it mathematically

or with analytical UH rigor. And the example of that that I use in the book was very early in the UH the Republican nominating process in late two thousand and fifteen, when you know, the Republicans had these enormous UH primary UH debates and you know, no one no one took Donald Trump seriously. Someone asked Ben Carson, who,

for whatever you think of him, was a very famous neurosurgeon. Uh. And they asked him what he thought of vaccination, and he thought the science and back of it was pretty far many, you know, gave the typical Republican answer, which was, but you know, no one's going to force you to take you know, I don't want anybody to be forced to take a vaccination. Uh. And Donald Trump interrupted him and said, I had an employed you who had a daughter who's got vaccinated, a beautiful child. This was a

beautiful child and she developed autism. It's an epidemic. I tell you, it's an epidemic. And he knew exactly what he was doing. Uh. He knew that. You know, Ben Carson's data were nothing compared to his narratives. All right, So that's why you know, that's that's an example of the importance of of narratives. Now status thinking again, Uh,

is is something that has to do with with sexual selection. Uh. If you're a female and you're looking for a mate, your major concern is passing on your d N A. And the way your DNA gets passed on is if you and your progeny are well provided for all right, and your your progeny will be well provided for. If your mate, uh, if the father of the children U is a mocker, You someone who can bring home the

meat and command other people. If you don't, you're not going to take a weekly because if you take a weekly, uh, then that that person, that man will not provide for you and your children. And you are less likely to pass your your June's on. And we see it today. Uh. You know in society today are a lot more likely to pass your jeans on if you're a rock star or athlete, then you know, if you're someone who didn't

graduate high school and can't jump. Interesting, So let's go to our favorite questions that we ask all of our guests, starting with what are you streaming these days? Give us your favorite Netflix podcast, Amazon Prime? What what's keeping you entertained during a lockdown? Well, I'm afraid I'm not much unpopular culture. That the the the series that we're into right now, uh is Green Leaf, which is about a African American evangelical church, and it's just it's just a

great soap opera. The acting, it's spectacular, the move the music is is fantastic, This cinematography is is you know, is Amy class. I mean, it's just absolutely a spectacular series and best of all, as sixty five episodes, so it'll keep you occupied for for a while. And you know, like everybody else's my ilk, I'm waiting for the next

season of Succession and better call Saul and Ozark. Uh. As far as podcast, uh go, I'm afraid that most of my reading bandwidth and my podcast Bandwich gets taken up by the Economist, and it's almost overkill to do both of those with the Economists. But the thing you get from Economists podcast that you don't get from reading the magazine is the flavor of just how smart and funny these people are. And you have to put names

on them too. Of course, you know the the the the Economist doesn't have bylines, so you actually get to listen to the people who hear about who excuse me, you get to listen to people who are writing the articles, and that is marvelously entertaining. I love Silent Money, I love your shows. Uh And and of course On the Media is another series that's very, very smart. I also like uh The New Yorker just because I simply can't get enough of David Remnick. He's certainly amusing. Uh. Let's

talk about some mentors. Who are the people who influenced your thought process, your philosophy, your career well. First of all, career wise, I have to give credit to two people who most people haven't heard of. One of whom is um Scott Burns, who wrote finance for the Dallas Morning uh news. Uh. He's not your typical personal finance writer. He went to uh M I p uh and then he would go over Harvard Harvard to take writing lessons

from Archibald Mcalish uh. And he was the first person who who basically encouraged me and told me that very few people had the ability both to do the mass and right well. And if I had that ability, and he thought I did, I should be encouraged to do it. And I was, you know, very discouraged at that point

in my career. So he gave me the impetus. And the other person and someone who's even more obscure financial advisor, right, and the Frank Armstrong, who was the right first person I'm aware of to put a finance book on the web, investing for the twentieth century or investing for the twenty first century. I think he had two different editions, and he was the one who told me to put my book The Intelligent Asset Allocator on the web, which jump

started my writing career. Now, as far as investing goes, you know, it's the usual suspects, Um, it's it's going to be Jack Burgel. So I did have some personal contact with and of course Farmer and French, who had almost no personal contact with, who were my intellectual mentors, and then they were the people who have helped me along in my career, prime among which are John Raiken, Pauler at Morning Star, and Jonathan Clements at the at

the Journal. And then he was succeeded by Jason's Wide, who is someone that I derived a great deal of uh personal inspiration from as well. That's a great list. Let's talk about some of your favorite books and and what you're reading right now. Okay, Well, the two favorite books that I always mentioned to everybody are Expert Political Judgment by philth Catlock, which talks about just how difficult it is uh to forecast well, how poorly people do

at and particularly the characteristics of poor forecasters. Which is which is immensely valuable since that turns out to me most of the people on EV And he explains exactly why people on TV UH talking heads tend to be miserable UH forecasters and identifies in fact that they that

they that they are. UH. The other book that I recommend, it's kind of a grim book and it seems irrelevant to finance, but I think it's just so very important, which is Lawrence Reaves's History of Ashwitz Ashwitz New History. And it was a history of Ashwitz from the perspective

of the camp personnel. UH. And the bottom line is, if you can understand how very ordinary Germans became mass murderers, then you can certainly understand Enron UH and world com and and we work all right, uh and and it's it's just a very important for people in finance if you can make that jump. Now. The book that I'm reading right now and not even done with it, but it's one of the most brilliant books I've ever read,

is a book called The Weirdest People in the World. UH. Weird is an acreneym W I l D, which stands for Western educated, UH, Industrialized, rich and Democratic, which is all of Western society. And it's a book, first of all, about how unusual we are. It's a book by man by Joseph Henrick, who is an interesting guy in himself, which I'll get to in in a minute. And he has this bizarre thesis which you know, strikes most people is outrageous, and if the reason why the book is

more widely read than it is. And the thesis is that we are who we are in Western society and we're rich the way we are because, uh, the Church forbade cousin marriage, which seems like a really weird hypothesis until he explains it to you. And then he goes into the data and back of it, which is just absolutely steel trapped. Uh. He brings an enormous amount of data from anthropology and social psychology, uh, to bear on it,

and he makes an extremely convincing case. Uh. And it's just that the the you know, the Church forbade the marriage of first cousins. They forbade the marriage of even fifth cousins in some instances. And if you can't marry your fifth cousin basically means you have to get out of town to find a mate. And what that does

is it greatly increases your radius of trust. Okay, you start trusting people who are outside your immediate family and tribe, and that is the essential characteristic of the wealthiest modern society. The reason why the dames in the Norwegians, uh and the Germans do so well is because they trust strangers, all right. And if you look at the places in the world that don't do well, that have poor poor economies and poor politics and poor institutions, its societies with

very low radius of trust. So, for example, it's the difference between northern and southern Italy. The radius of trust in northern Italy is very high. The radius of trust in in um In uh sard in Italy is very very low, and something that sociologists have known about for years, for decades. So it's it's a book that explains all that, and it's it's just, uh, it's an amazing read and I can't recommend the book highly enough. Interesting, you mentioned

he has an unusual background. He didn't start act with the usual four star you know, academic background. He started out as an aerospace engineer, I think at a state university somewhere, but he's been a minor in anthropology and after working in aerospace for a while, and you look at his pictures and he looks like your typical aerospace engineer, you know, with the find horns and glasses. He doesn't have a pocket protector, but he should have one. Uh and uh. And he starts doing He gets a PhD

in anthropology, and he starts doing his research. And the research is so so remarkably good that he just gradually ascends the academic um uh ladder. First the University of British Columbia, and now he's gotten endowed share of anthropology at Harvard and this enormous team of multidiscipcenary researchers in under him, you know, psychologists and economists, uh and social psychologists,

and his his work is just absolutely brilliant. Once once you start reading the book, if you're academically inclined, that you'll get lost in the thicket of his references because the references are so fascinating. So he's another left brain right brain person who could do both the math and the narrative side. Yes, you're going to have a mentioned is fact. He also writes very well, right, you're another one of those people who have the ability to deal

with the underlying mathematics and the language side. And that's a relatively rare combination of skills. Shucks, belly, I'm just a simple country neurologist. That's right. Let's get to our last two questions. What sort of advice would you give to a recent college graduate who was interested in career in either neurology, investing, or writing. Well, the usual admonission

to follow your bliss uh is just awful advice. Um. You know, my favorite of my favorite New Yorker cartoons is the typical cartoon where they have a guy with you know, sitting on the street and shambles with a with a with a hat in front of them, and his sign says, followed my bliss. Uh. You know you have to you have to make a living. Uh. And the best thing you can do is to melt those two things. You shouldn't. You shouldn't take a job if

you despise just to make money. But on the other hand, you know you shouldn't get a degree in ethno musicology as well and expect to have a happy existence. Uh. You know you need to to have a decent standard of living. You need to provide for your family, and you need to save up so that if you ever get sick of your job, you can follow your bliss at that point and I have to worry about your

next your net to meal. And the best part of doing that is if you can wind up with reasonable savings at age forty or fifty, you don't have to worry about what to do with the last twenty or thirty years of your life because you'll have whole in your careers in front of you and usibly things that you genuinely enjoy doing. So don't follow your bliss, don't take a job just for the money. Try and mel

those through things intelligently and balanced them off. I have to ask, since you you referenced, what what's your take on the whole early retirement fire community that that seems to believe you can save enough money and tap out at in your thirties or forties. Oh, it's a great idea, as long as you don't get sicker have kids. So not a fan, let me uh, I think I think the hardest in the right place. I think they're a little delusional, and of course they also ignore you know,

about the realities of life. And I think they also ignore Uh, you know, what do you do with your life when you go to the beach at age thirty or forty? You better have something worthwhile that you want to do with your life. You better have a mission in life, because if you're don't, you're going to wind up coffering from industrial grade on the way. I don't

want to trash them too much. I mean, I like these people, and I think that their message for our society that we live in a corrosive consumer culture that has to be resisted and you should keep your living expenses down, is certainly a very salutary message. Fair enough, And our final question, what do you know about the world of investing today that you wish you knew thirty plus years ago or so when you were first getting started in finance. Well, you know, academics like to play

this parlor game of do equities become riskier? Uh? You know, over over less riskier, more risky over over time? And there are an instant both sides that most academ missions will tell you that they become riskier with time. But what I only fully understood, you know, after until after doing it. I didn't understand until after doing finance for a couple of decades, was that that's kind of a silly question. Uh. The real question is how risky are

stocks at a given stage in your life cycle? Uh. And so if you are retired and you don't have any human capital left, then stocks are three mile Island chernewbyl toxic. They're very dangerous because you know, if you have a bear market, bad bear market, uh that's prolonged, you've got bad sequence risk and you may wind up

eating eating out out. At the other end of the spectrum, if you're young, there's almost no risk to earning stocks because you're periodically saving, and at some point in your thirty or four year saving career, you're gonna buy a lot of stocks very cheap, and you're gonna wind up doing very very well. And I wish I had understood that earlier in my career, so I could have been more aggressive earlier in my career. But you know, as it was at the time, So I don't feel too

bad about doot. But if there was one lesson I wish I had had I had learned I had internalized it was I could have been a lot more aggressive when I was younger. Very interesting, Bill Bernstein, Thank you so much for being so generous with your time. We have been speaking with William Bernstein, author most recently of the Delusion of Crowds, Why People Go Mad in Groups,

as well as a dozen other books. If you enjoy this conversation, well be sure and check out any of the previous three hundred and ninety conversations we've had over the past seven years. You can find that at iTunes, Spotify, where wherever you feed your podcast fix. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Give us a review on Apple iTunes. You can sign up for my Daily reads at Ridolts dot com. Check out my weekly column on Bloomberg dot

com slash Opinion. Follow me on Twitter at rid Halts. I would be remiss if I did not thank the crack staff that helps us put these conversations together each and every week. Tim Harrow is my audio engineer. Atico val Brond is my project manager. Michael Boyle is my producer. Michael Batnick is my head of research. I'm Barry rit Halts. You've been listening to Masters in Business. I'm Bloomberg Radio