The Psychology of Crowds… #MallofAfrica

Following on from my post on the opening of the new Makro in Brakpan, and the opening of the new Starbucks in Rosebank, and all the mad queueing that took place (“Take me far from this madding crowd #Makroeconomics“), I’d like to endorse these tweets:

And let me also highlight some highlights from the “See the Huge Queues at the Mall of Africa Grand Opening” article on mybroadband.co.za:

I mean, queueing for opening specials at H&M and/or Clicks…

And I’ll repeat my original point here: can we really assume, as much macroeconomic theory does, that the actions of a crowd are simply the sum of the actions of the rational individuals within said crowd? Or, at least, that it averages out to be the case over the long-term, in general, overall, and when it matters.

Because there is a counter to that: events like the Mall of Africa Grand Opening, and mass-queuing for discounts in clothing stores on an opening day when there isn’t the same mass-queuing for similar discounts at other sales on somewhat less auspicious/marketed occasions.

But let me backtrack here and give a standard example of “rational” mob mentality…

The Rationality of Bank Runs

So if you look at the way that bank runs happen:

Rumours fly around that a bank is having difficulty.
Some people rush to the bank to start drawing out their money.
The bank starts to run out of money to give out.
The rumours are now confirmed that the bank is having difficulty, because it’s running out of money to give out.
Everyone rushes to the bank to draw out their money.
The bank folds. Or it gets a bailout.

And this is classic rationale at work. Each individual basically knows the following:

The bank may or may not be in trouble.
If I go and draw my money, I’ll have my money.
If I don’t go and draw my money, and the bank turns out to be fine, then I’ll still have it.
But if I don’t go and draw my money, and the bank turns out to be very not fine, then I won’t have my money at all.
Logical conclusion: to be safe, let me just go down there and draw my money.

And this logic even stands up for those deep-thinkers who know that drawing money from the bank may well cause the bank’s downfall:

The bank may or may not be in trouble.
If I go and draw my money, I’ll have my money.
If everyone rushes to draw their money and causes the bank to fold, then I won’t have my money.
If the bank is fine and I’ve drawn my money, then I can always put the money back.
Logical conclusion: to be safe, let me just go down there and draw my money.

And it all looks very logical, and perhaps the economists have it right, and perhaps Mall of Africa Grand Openings are just examples of people getting emotional about non-economic drama and it’s all just marketing-hype anyway.

More Logical Conclusions

So in the face of irrational queues and rational bank runs, you can conclude one of the following:

Option A: Crowds are rational. Perhaps those queues for Mall of Africa aren’t actually irrational, and perhaps we’ve just misread the internal rationalisation process of all those individuals. Like maybe I’m underestimating the pleasure and utility that people get from getting stuff on special, or the pleasure of being at an opening day and feeling like you’re part of something exciting. These are economic factors as well.

Option B: Crowds can sometimes be rational, and can sometimes be irrational. Perhaps it’s both. And really, the question to be answered here is how to tell which is which, and what the triggers are.

Option C: Crowds are irrational. Maybe we’re just rationalising the bank run process in retrospect. As in: no one really thought that much about it. Most of the crowd were just out for coffee, and saw quite a long queue at an ATM, and decided to join it because they assumed that other people in the queue must know something that they don’t. And as more people joined the queue, more people in the vicinity panicked. And then Twitter and Facebook and the news happened, and suddenly, everyone was just rushing down to the bank in a panic to get their money. You know, like that bank run scene in Mary Poppins.

For what it’s worth, my current bet is actually on Option C.

But perhaps I’m a pessimist.

If you’d like to do a bit of extra reading though, I had fun on this wikipedia page: Crowd Psychology.

Happy Weekend.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.