Transcript: William J. Bernstein




The transcript from this week’s, MiB: Bill Bernstein on the Delusions Of Crowds, is below.

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This is Masters is Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTES IN BUSINESS: This week on the Podcast, what can I say? Bill Bernstein is a brilliant author, neurologist, financial theorist, investor, his most recent book “The Delusion of Crowds, Why People Go Mad in Groups” is going to be one of those must read books in the pantheon of both bubbles and behavioral finance. He’s written so many books. “Birth of Plenty”, “Investor’s” “Asset Allocator” ,”The Four Pillars of Investing” just too 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, 500, a thousand, 2,000 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, Tesla, you name it, you’re going to find this to be just a fascinating dive.

So with no further delay, my conversation with William Bernstein.

VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

TOOMEY: 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.


RITHOLTZ: So let’s dive right into this. Before you were an investor and an author, you worked as a medical doctor with a specialty in neurology. How did that background help you as an investor?

BERNSTEIN: Really only a very indirect way, you would think that being a clinical neurologist I would help you with psychology and the neuropsychology but really practicing neurology is a very down and dirty ground-level occupation.

You know, what I would like to explain to people is that the great neuroscientists that we think of, you know, people like Damasio are like great artists, they are Michelangelos and da Vincis or what I did was more Sherwin-Williams, it was neck pain and back pain. Rather, what helped me write about finance is simply the scientific training and back of being a doctor. The importance of examining data, seeking it out and rigorously analyzing it.

RITHOLTZ: Interesting. So I mentioned to some colleagues that I was going to be speaking with you and one of them 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?

BERNSTEIN: No, this is the very definition of dumb luck. As it turns out, my publisher decided to delay bringing the book out for about 6 months because they didn’t want to bring it out right before the election because they figured that would suck up too much of people’s bandwidth and so it got delayed until just at the moment when people started you know believing in QAnon and occupying the capital building and going nuts over Bitcoin and Gamestop.

RITHOLTZ: So we will 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 mass delusions?

BERNSTEIN: Well, you can think of a mass delusion the same way you think of the pandemic, there is an agent – a causitive agent, so in the case of the pandemic, it’s the coronavirus, in the case of the black death, it was yersinia pestis, and then there is a vector, and the vector for COVID is people coughing and spraying each other with droplets and with the black, it was you know, fleas and rats transmitting the disease across great distances.

Well, it’s the same thing, it’s the same way with delusions. The agent is the narrative, and the more compelling the narrative, the more virulent, the more dangerous the agent, and then you got the vector, and the vector is the medium through which the delusions spread and what we saw over the past 10 years of the evolution and the explosion of social media. And so that is one of the most powerful vectors of delusions that we have ever seen and it kind of like we’ve gone in the days of the old media from being. you know, widely separated people who are infected and we’re gone now into a world where everybody is in the same airless room and they are coughing on each other.

RITHOLTZ: So let’s stay with the idea of narrative. One of the things you referred 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?

BERNSTEIN: Well the narrative is the causitive agent, okay? And 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 and our analytical ability.

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, that is most financially applicable is the narrative that you can become effortlessly rich just by going online and clicking a few keys and there is almost no effort involved. That is a very pleasing and very compelling narrative. The other narrative that I examined in great length in the book is the most compelling religious narrative out there which is the one that the world is going and very quickly, which it turns out is far more prevalent than most people in your and my bubble think that it is.

RITHOLTZ: So let’s stay with that, because there is some really fascinating combinations of apocalyptic end times and investment mania. One of the things I found about the hard-core gold bugs as well as the hyperinflationists is that overlap between hey when it hits the fan 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.

BERNSTEIN: Yes, and you can throw into that, conspiracy theories, social psychologists have found that the two biggest correlates of conspiracy theorists are a belief in the end times, that is the theological, the religious end times, and the other characteristic that it correlates with is Manichaean thinking, a belief that the world is divided into black and white, good people and bad people with nothing in between, the Manichaean personality, good people never do bad things and bad people never do good things even though we know that happens all the time.

RITHOLTZ: Yes, that binary approach to reality seems to be a gross oversimplification and it certainly doesn’t work for investing. I can imagine it works in day-to-day life although people certainly seem to be functioning despite holding some pretty insane beliefs.

BERNSTEIN: Yes, absolutely, I mean you are right, I mean occasionally, you know, Jim Kramer gets things right.

RITHOLTZ: So Kramer is an interesting example because he leads a group of followers, 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 Reddit’s Wall Street bets, there are no leaders there, there are no proselytizers there, can you have a mob with no leader? I think something like 10 million people follow Wall Street bets but no one person controls that group.

BERNSTEIN: Absolutely, that’s the way it happens most of the time. You know when someone goes up on a ledge 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 10 percent of the time, people start shouting up to the person to jump, all right?

This is one of the sad accouchements of human nature, well certainly there is no leader there and it is certainly possible, in fact, that I think that history shows that most manias really don’t have an identifiable leader.

RITHOLTZ: 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, our 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, how key a factor is that in both religious and financial decision-making?

BERNSTEIN: Well you said the magic words, you know, cognitive dissonance was something that was written about and talked about by Leon Festinger although he didn’t invent the term and you know it is somewhat overdone, I think, especially in modern culture, but it’s certainly still a fact that really what cognitive dissonance 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 facts and things that disconfirm your theory.

And to give you an example, the 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 that the Bible prophesizes that didn’t come through and those get conveniently ignored by religious fundamentalists.

RITHOLTZ: 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 tension 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.

BERNSTEIN: Well what you are talking about is a concept that was written about in 1946 by a psychologist by the name of Fritz Heider. And it’s an important concept because it explains a lot so I will spend just a little bit of time on it. Which is that of a balanced state. So let’s say that you’re, you know, a Trump supporter, okay? And you meet someone and they are a Trump supporter and you really like the person, all right? Then you are 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 (ph), then you are in a balanced state too because it enables you to dismiss his or her opinion. But on the other hand, if you are Trump supporter you disagree with your very best friend about it, about Donald Trump, then you’re in an unbalanced state and you have to revolve that, you either have to decide that Donald Trump isn’t so good or you have to decide that you don’t like your friend so much anymore which is much more likely to happen because people it easier to lose their friend than to completely obliterate their belief system.

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 unbalanced date and then when that gets resolved, you see other areas of the brain will light up.

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RITHOLTZ: So when we hear about family members having disputes with other family members over QAnon, 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, it that balanced state issue what’s underlying that schism with — even within families?

BERNSTEIN: Yes, to bring in a four-bit bet, that is a classic Heiderian unbalanced state and it has be resolved one way or the other, and the way most people resolve it is they cut themselves off from people who have strong political disagreements with.

RITHOLTZ: Quite interesting. Let’s move towards fear and greed, those are the phrases I’ve always heard in finance, but if we want to get more specific then when we look at the limbic system you discussed more precisely I’m going to mangle this, the nuclei accumbens and the amygdala, how important is the limbic system to our financial behavior?

BERNSTEIN: Well, it’s almost everything and 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.

RITHOLTZ: That’s interesting. I have a few more specific questions from the neurology perspective, also from the perspective of evolutionary history. You referenced a preference for quote “rationalization over rationality” what evolutionary purpose does that serve?

BERNSTEIN: Well in a state of nature, you have to react very quickly if you say you black and yellow stripes in your peripheral vision, or you hear the hiss of a snake, you better move and better move quickly 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 central structure that you — that you have at least in your brain, it is.

And you know, the central nervous system extends below the brain but that is getting too much in the weeds. And so evolutionarily, it’s got real survival value but it also leads to something else which is patternization, okay? Seeing patterns that really aren’t there because there is relatively little penalty for doing that, if you — if you think you yellow and black stripes in your peripheral vision and you jump but it’s really not a tiger, it’s something else, you haven’t lost much, but if you underinterpret the black and yellow stripes, they you are lunch.

RITHOLTZ: So false positives….

BERNSTEIN: So we have this evolutionary drive, that let me we lead this to over interpret things and the analogy I think that is best is that you know if you’re a skunk millions of years of evolution have told you that when you meet a large predator, you turn 180 degrees, lift your tail and spray.

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 60 miles an hour, that is not a functional response and unfortunately that’s the world we live in today.

RITHOLTZ: So false-positive stare no-cost but false negatives are really significant from an evolutionary perspective.

BERNSTEIN: From an — yes, but today, it’s the other way around, today the false positives that we were prone to has a very high cost.

RITHOLTZ: 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?

BERNSTEIN: Well, again, it’s got obvious survival value. In the first place, it’s something that is almost so obvious that we never — we never talk about it. You know, I mean things generally getting better is not what makes it to the headlines, all right?

So we don’t attend good news as much as we attend to bad news, and in a state of nature, once again, it has obvious survival value, one of the questions I get asked as a doctor – or did get asked as a doctor and people who still ask me this question is you know, when I was five, you know, when I was 10 years old, I ate some Chinese food and I got horribly sick, and I’ve not been able to look at Chinese food ever since, why is that? I can’t get past it.

And the answer is very simple, if in a state of nature, you ate a certain mushroom and it made you sick never wanting to have that mushroom again was a very useful response.

RITHOLTZ: Interesting. So I love the quote you used from Charles Kindleberger, there’s nothing so disturbing to one’s well-being and 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?

BERNSTEIN: Well, one of the — you know, what my book really is it’s really a meditation on human nature, so we have already discussed the fact that you know, man is the ape to tell stories, the foremost thing which we haven’t talked about yet is man is that ape that imitates. But the third most important characteristic of human nature I talk about is man is the ape that seeks status. Why do we seek status, well because it helps us pass on our DNA particularly if you’re a male.

You know, it’s why rock stars and athletes do so well with women because in the state of nature, if you’re good at telling stories or if you are good at hunting animals, you can support me, so it’s the same thing, it’s a very basic part of sexual selection, we seek status so we can pass on our DNA.

RITHOLTZ: 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 are like financial bubbles and violent end time apocalyptic perspectives originate and propagate, why is there such parallels between finance and religion?

BERNSTEIN: Because they basically involved pretty much the same drives, you know, I have talked about how compelling financial narrative can sweep people up and it’s ambit and the same thing happens with the compelling religious narratives.

Now if we want to look at a compelling narrative and we want to go with the rubric of bad is more compelling than good or bad is stronger than good, then the most compelling narrative in all of the world has to be the one in which the world ends in a fiery inferno.

And so that is a compelling narrative that really gets people’s attention and then to bring the status part of it in, you know if the world if the world is going to end in a fiery inferno then what more pleasing outcome then if you are able to avoid it because you friends are devout. So that speaks to our desire to acquire both status and you know the financial narrative, you are going to become effortlessly rich, that’s very pleasing, the religious narrative is the world everybody’s going to go to hell except for you and people who believe like you.

And it’s very pleasing, it gives you and your in group status.

RITHOLTZ: So on a very related quote from the book, quote “Immersion in 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?

BERNSTEIN: Well in finance, that is one of the ways that you identify a mania or a bubble.

It’s one of the characteristics which is when you disconfirm, when you get the disconfirming opinion to someone who is in the grips of a financial mania, this delusion that they are going to become effortlessly rich, they push back and they get very angry. And I don’t know you — this happened to you. What you are doing you know, back in the late 90s but I was still middle-aged 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 people made aspersions about my parenthood, 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 religion, it’s why you don’t argue with people ever about religion, you don’t want to even think about disconfirming their religious beliefs.

RITHOLTZ: So I had a very similar experience leading up to the ’08, ’09 financial crisis, I was bearish 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. 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 would seem to be convinced that they saw it coming also.

BERNSTEIN: Yes, my favorite example of that was you know, in summer around ’06 or ’07, I was listening to Bob Shiller be interviewed by somebody about the real estate bubble that was still evolving that that point, and he was being interviewed someone from your know, the National Association of Realtors and she wasn’t having any part of it and finally, she got so frustrated with Professor Shiller that she stopped him and said Professor Shiller, I don’t know who you think you are but you don’t know the first thing about real estate.

RITHOLTZ: (LAUGHTER) That’s hilarious. Nobel Prize to follow.

So here is 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?

BERNSTEIN: I don’t know the answer to that but it is a near constant feature of human nature to believe that things will always better a generation or two or three generations ago when it is manifestly not — that is manifestly not the case and you can see it all the way back to the dawn of literacy.

I mean one of the archaic Greek poets was a fellow named Hesiod who was well known for a collection he wrote called “Works and Days” and he talks about how you know, four or five generations ago, there was a generation of golden men who lived wonderful lives and were virtuous and were prosperous and then with each successive generation, things went to hell in a hand basket until you know they were in the current generation where no one respected their elders and the world was corrupt and things were generally, generally awful. It was, you know, (inaudible) of these days.

RITHOLTZ: Two areas where people tend to go mad are 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 those two particular assets?

BERNSTEIN: Well I think, certainly, bitcoin is — exhibits all the behavior of a bubble, you see large groups of people who think that they are going to become effortlessly rich investing in bitcoin, you see people quitting their jobs to trade it, you see anger directed at you when you express skepticism my favorite bit of anger was of John McAfee’s famous statement that he would perform an act on himself that requires great spinal flexibility on national TV if he didn’t half a million dollars…

RITHOLTZ: (LAUGHTER) by a date that’s already past, right? He already missed his window…

BERNSTEIN: Yes exactly.

RITHOLTZ: He lost that bet.

BERNSTEIN: Yes, yes. So you see that, you know, certainly with Bitcoin. Now Tesla is a more difficult case, I mean Tesla may actually wind up being a very successful company whether it will justify its valuation is another story. There are other people in the world know how to make electric vehicles besides Elon Musk, and so it’s not immediately clear that is what’s going on, I don’t see the kind of mania surrounding Tesla stock, where is see the mania surrounding is the Tesla car which is a different thing.

The real passion that I see is it’s not that people love their Tesla stock, it’s the evangelicalism of people who love their Tesla cars.

RITHOLTZ: I’m going to take it a step further than that. I just had the Mustang Mach E for a week to play with and it’s not even the cars, it’s the software within the car whenever I discussed the Mustang with other Tesla owners, the compare and 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 over the air automatic updates it’s the self driving, it’s all the software things that Tesla has created beyond the actual vehicle itself and it’s kind of fascinating.

BERNSTEIN: Yes, well that is because you and I are older than dirt and we are the generation when cars were really, really important you know to young people, their phones and the capability of their phones are much more important than the capability of their cars.

RITHOLTZ: So my generation, a car meant freedom but the current generation I don’t think seals the same way about escaping a small town as Bruce Springsteen did in “Born to Run” it’s certainly a generational difference.

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RITHOLTZ: 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 inspiration for this, so what motivated you to want to update the original work by Charles McKay about the madness of crowds?

BERNSTEIN: Well, yes, McKay was a journalist who in 1841, writes this book “Memoirs of Extraordinary Popular Delusions and 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 describe the two great bubble of the 18th-century and also the supposed bubble up and surrounded tulip bulbs in the 17th-century which turned out not to be of a societywide phenomenon as McKay made it out to be but it’s the most famous chapter in the book because he coins the word tulipmania, and gives it to the English language.

And so for generation, after that book has remained in print and has saved people bacon, Bernard Baruch famously read the book right before the crash in 1907 and recognized the signs of the times, and he loved the book so much that he actually wrote the introduction to the 1932 edition of the book. And of course I read the book in the mid-1990s just before the tech bubble started to really get going, 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 of the time which were pretty well behaved in retrospect.

And then all of a sudden before my very eyes, I saw this bubble blow and you know, it saved my bacon way it did probably most other people who had read the book. So that sort of stayed in my memory banks and then you know, five or six years ago, I observed the way everybody else did, the ability of the Islamic state to attract tens of thousands of people from around the world including from some very prosperous and secure Western nations to go to one of the most dangerous and worst places on the world and to you know in many cases, to die or to become seriously injured.

And the way they did it turns out was by deploying this end time narrative which McKay had also written about in his book, and then I realized at that point, I had to update the book because we now know a lot more about the neuropsychology of why these things occur which McKay could know because of the state of science at the time.

RITHOLTZ: So I love this quote from Charles McKay. “Man, it has been said, think in herds, it will be seen that they go mad in herds while they only recover their senses more slowly and one by one” why is that?

BERNSTEIN: Well, it’s because disconfirmation is solitary process, it’s a process where you have to look inside yourself and say my God, I was an idiot, and it’s a very individual process where it’s the spreading of the mania, the spreading of the virus, of the contagion is a social process.

RITHOLTZ: So you mentioned social networks earlier whether it’s Facebook or Twitter or TikTok or what have you. They seem to be accelerating both the creation of these memes and the way they’re propagated, do you think there 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?

BERNSTEIN: Yes, I think that absolutely true. A mania can spread more rapidly and more widely today than it ever could before. The thing that is really interesting is that you know with each generation, with each advance in communications technology, you have the potential for accelerating delusions. For example, it’s no accident but two of the delusions that I wrote about in the book were 16th-century episodes that 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 continental Europe starting around the year 1500 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? You know, serious journalistic ethics, Walter Cronkite and you know, Edward R Murrow, tended not to lie to people, although Adolf Hitler did and certainly spread a mass delusion and he did it primarily with radio.

RITHOLTZ: 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, then just a massive land rush and overinvestment, misdeployment of capital, accompanied everything from railroads to radio, television, automobiles, even fiberoptics, 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.

BERNSTEIN: Yes, that is something that is almost a constant of financial history is there are technologies that really change the world. I mean, you know, the internet really did change everything, okay, it just that it didn’t make the average investor who invested in the tech companies of late 90s wealthy.

The paradigm for that is something I write about in the book which is Global Crossing, Gary Winnick’s firm which was a fiasco from a financial point of view, but the man did build a large percentage of the world’s fiber-optic capacity and he didn’t foresee two things, one of which he should have foreseen which was that you know, there would be competing lines laid that would cut into his profits.

But the other thing which he didn’t foresee and I don’t think anyone really foresaw was that the improvement in drive plant, that is the relays and transmitters and receivers along the fiber-optic chains would improve so dramatically that a fiber — the capacity of a fiber to carry data without changing the fiber all would improve by orders of magnitude without laying any new fiber. So between, I don’t know, about 2002 and in 2015, there was almost no fiber — new fiber laid and yet the capacity, the carrying capacity of the fiber went up by about a thousand fold.

RITHOLTZ: That is amazing. Arguably, Global Crossing bandwidth capacity is responsible for everything from YouTube to Facebook that could not have existed in the pre-fat pipe days.

BERNSTEIN: Yes, the concept that I talked about in the book is that technology investors tend to be capitalism philanthropists, okay?


BERNSTEIN: They tend to put money into vitally needed infrastructure that benefit society at large but benefits all of us whether it’s the railroads or radio or television or aircraft manufacture but they don’t make any money in the process, they would probably be better off as the old joke goes, throwing half the money out the window and burning the other half.

RITHOLTZ: (LAUGHTER). So I want to stick with the some of the 18th-century bubbles, you write about the South Sea bubble and the Mississippi Company bubble, in Europe, one of the data points that just stunned me, 40 percent of 18th-century European stock issuance occurred in a single year, 1720, how on earth is that even possible?

BERNSTEIN: Well, we saw — that was an extreme example. I don’t think we have seen anything quite like it ever since. But certainly, you know the amount of IPL issuance of new shares or new company births, in the 1990s was a very similar phenomenon and left us with some, companies that are very important today, prime among which is Amazon, no pun intended.

RITHOLTZ: (LAUGHTER) 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 South Sea Company was worth twice the value of all of the lands in England and we saw an echo of that in the 1980s 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 but bubbilicious behavior?

BERNSTEIN: Well, you have to go back a step and ask what are the e factors that underlie bubbles 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 time of lowering, gradually falling interest rates which certainly has some relevance today and what happens is the classic real estate bubble cycle which is you buy a piece of real estate, it appreciates in value that enables you to borrow more when you collateralize it, so you take that capital and you buy more real estate. The prices continue to rise which enables you to borrow more and more and it becomes very self-inflating cycle until it finally blows up.

RITHOLTZ: That is my favorite scene in the movie version of “The Big Short” where Steve Carell is talking to I don’t remember if it was a waitress or a stripper who owned a house and was talking about how she financed it and he asked her a question and her answer was “houses” he’s like “You have more than one?” she says “I have five” and it — 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 get rich as quickly as they can.

BERNSTEIN: Yes, my favorite story and I think it may have come from one of your episodes was when Dick Thaler did the five bet scene with who was it, Jennifer Lopez?


BERNSTEIN: And it turned out Jennifer Lopez didn’t know who Dick Thaler was and Dick Thaler didn’t know who Jennifer Lopez was.

RITHOLTZ: Was it JLo or was it Selena Gomez? I don’t remember.

BERNSTEIN: Yes, I honestly don’t know, tells you what generation I belong to but the actress didn’t know who Thaler was and vice versa and I thought that was hilarious.

RITHOLTZ: To be fair, another person a decade before they won their Nobel Prize, so you know maybe it was a you know, to her, just an obscure economics professor toiling in obscurity in Chicago.

There’s a couple of really just fascinating digressions within the book, I love this reference to some of Barry Eichengreen’s work, he is 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?

BERNSTEIN: Well, in the first place, we get back to the Paris company, the Mississippi Company bubble and that would was John Law’s great innovation was he realized what hard money was a drag on any companies’ economy and financial development and so he basically introduced paper currency to France. And unfortunately, he went overboard but he is probably, you know, I think he is arguably the father of modern central banking and modern finance. He invented the system that we have today, it’s just that he — you know, he and the Duke d’Orleans blew it up.

So Eichengreen is of course, did the seminal research in this area, you’re talking about a book called “Golden Fetters” and the research behind it. So whenever you hear a mainstream economist you know, gag when you mentioned the gold standard, it’s Barry Eichengreen they are channeling and his work.

My favorite trope of the gold bug is that gold has been money for 5000 years, it certainly has not been money for 5000 years, you know it wasn’t started to be used as money until the Hellenistic period in Greece which was not much more than 2000 years ago. And before that, lots of things were money. You know, a leader of grain was money, a head of cattle was money, if you wanted something that looked more like hard money back in the ancient world, silver was the real hard money of that era, it wasn’t gold.

RITHOLTZ: Yes, it’s going to be curious to see what happens to the gold bugs when we lasso some asteroid with you know a billion metric tons of gold and platinum in it, it might change their belief in 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 those around them regardless of how baseless or self-destructive that behavior may be. What’s behind our propensity for imitation?

BERNSTEIN: Well, in the first place, we really haven’t talked about this when you ask what is the primary psychological mechanism of manias, it’s our proclivity to imitate from something as basic as just yawning, it’s why yawning is infectious, and the infectiousness of yawning is something that’s actually even studied in some detail and I won’t get into how interesting it is, but trust me, yawning is very, very interesting.

But what is behind that is something that it’s very simple, and that is the paradigm of thinking about human occupation of the new world, North and South America which began somewhere around 15,000 to 20,000 years ago with the space of several thousand years, humankind spread from the frozen Arctic wastes down through the North American continent and into South America and the Andes and all the way down to the Tiera Del Fuego and along the way, human beings have learned how to make kayaks and how to hunt bison and how to make poison blowdarts.

And all of the endeavors are very complex, they are 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 and the way your tribe will survive is if you are very good at imitating, you know, if Joe and his friends figure out how to build a kayak from scratch, then rather than figure it out yourself, you’re going to imitate that, all right?

So the ability to imitate carries enormous survival value not only for individuals but for entire societies as well. And unfortunately, it’s a good deal more dysfunctional in the modern world because that ability to imitate carries with it the proclivity to manias and the proclivity manias, it may not be that dangerous in a state of nature, but in a world of social media, it’s deadly.

RITHOLTZ: Interesting.

So we briefly touched on some of the evolutionary adaptations that works so well on the savanna but hurt us 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’s been done in this space?

BERNSTEIN: Well, the narrative proclivity is something that you think about it is fairly obvious which is that when you and your colleagues 15,000 years ago went out to hunt wooly mammoth, you didn’t issue mathematical vectors to each other, that’s not the way the human mind works, we use our left hemisphere stark ability to communicate with words so you know Joe, you go left, Fred you go right and you will both spear the mastodon from both sides. That’s how we communicate with each other and that’s how we transmit our values. We don’t to mathematically or with analytical rigor.

And the example of that that I used in the book was very early in the Republican nominating process in late 2015 when the Republicans had these enormous primarily debates and you know, no one took Donald Trump seriously. Someone asked Ben Carson, who for whatever you think of him was a very famous neurosurgeon and asked him what he thought of vaccination, and he thought the science in the back of it was pretty solid, may gave typical Republican answer which was no one is going to force you to take – you know, I don’t want anyone of you to be forced to take a vaccination, and Donald Trump interrupted him and said I have an employee who had a daughter who 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. He knew that Ben Carson’s data were nothing compared to his narrative, all right? So that’s why – that is an example of the importance of narratives.

Now status seeking again is something that has to do with sexual selection, if you’re a female and you’re looking for a mate, your major concern is passing on your DNA and the way your DNA gets passed on is if you and your progeny are well provided for, all right? And your progeny will be well provided for if your mate, if the father of the children is a (inaudible) he is someone who can bring home the meat and command other people. If you don’t — you are not going to pick a weakling because if you pick a weakling, then that person, that man will not provide for you and your children you are less likely to pass your genes on.

And we see it today, you know, in society today, you are a lot more likely to pass your genes on if you are a rockstar or if you are an athlete, then you know if you are someone who didn’t graduate high school and can’t jump.

RITHOLTZ: Interesting. So let’s go to our favorite question that we ask all of our guests starting with what are you streaming these days, give us your favorite Netflix, podcast, Amazon Prime, what’s keeping you entertained during the lockdown?

BERNSTEIN: Well, I’m afraid not much on popular culture but the series that we are into right now is “Greenleaf” which is about an African-American evangelical church and it’s just a great soap opera, the acting is spectacular, the music is fantastic, the cinematography is you know, is any class, I mean it’s just absolutely a spectacular series and best of all, it’s 65 episodes, so it will keep you occupied for a while.

And you know, like everybody else of my ilk, I’m waiting for the next reason of the “Succession” and “Better Call Saul” and “Ozark” as far as podcast go, I’m afraid that most of my reading bandwidth in my podcast bin gets taken up by “The Economist” and it’s almost overkill to do both of those with “The Economist” but the things you get from “The Economist” podcast that you don’t get from reading the magazine is the flavor of just how smart and funny these people are.

You have to put names on them, too, of course “The Economy” doesn’t have byline so you actually get to listen to the people who hear about — excuse me, you get to listen to the people who are writing the articles and that is marvelously entertaining. I love “Money” I love your show and of course “On the Media” is another series that is very, very smart.

I also like “The New Yorker” just because I simply can’t get enough of David Remnick.

RITHOLTZ: He is certainly amusing.

Let’s talk about some mentors, who were the people who influenced your thought process, your philosophy, your career?

BERNSTEIN: Well, first of all, careerwise, I have to give credit to 2 people who most people haven’t heard of one of whom is — Scott Burns who wrote finance for the “Dallas Morning News” he is not your typical personal-finance writer, he went to MIT and then he would go to Harvard to take writing lesson from Archibald McLeish, and he was the first person who basically encouraged me and told me that very few people have the ability both to do the math and write well and if I have that ability, and he thought I did that I should be encouraged to do.

And I was very discouraged at that point in my career so he gave me the impetus.

And the other person, someone who is even more obscure, a financial advisor by the name of Frank Armstrong who was the very first person that I’m aware of to put a finance book on web, “Investing for the 20th Century” or “Investing for the 21st 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 jumpstarted my writing career.

Now as far as investing goes, you know, it’s the usual suspects, it’s – I try to be Jack Bogle so I did have some personal contact with and of course, Fama and French who I have almost no personal contact with who were my intellectual mentors, and then there were the people to help me along in my career upon among which are John Rekenthaler at “MorningStar” and Jonathan Clements at “The Journal” and then he was succeeded by Jason Zweig who is someone that I do have a great deal of personal inspiration from as well.

RITHOLTZ: That’s a great list.

Let’s talk about some of your favorite books and what you’re reading right now.

BERNSTEIN: Okay, well, the two favorite books that I always mention to everybody are “Expert Political Judgment” by Phil Tetlock, which talks about just how difficult it is to forecast how poorly people do and particularly, the characteristics of poor forecasters which is immensely valuable and that turns out to be most of the people on TV and he explains exactly why people on TV talking heads tend to be miserable forecasters and identified the fact that they are.

The other book that I recommended, it’s kind of a grim book and it seems irrelevant to finance but I think it’s also very important which is Laurence Rees’ history of Auschwitz — “Auschwitz, a New History” and it was a history of Auschwitz from the perspective of the camp personnel and the bottom line is if you can understand how very ordinary Germans became mass murderers, then you can certainly understand Enron and WorldCom and WeWork, all right?

And it’s just very important for people in finance if you can make that jump.

Now the books I’m reading right now, I’m not even done with it, but it’s one of the most brilliant books I have ever read is a book called “The Weirdest People in the World” weird is an acronym, WEIRD e which stands for Western Educated 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 the name of Joseph Henrich who is an interesting guy in himself which I will get to in a minute. But he has this bizarre thesis which you know, strikes most people’ as outrageous and it’s the reason why the book isn’t more widely read than it is, and the thesis is that we are who we are in western society and we are rich the way we are because 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 document which is just absolutely a steel trap.

He brings an enormous amount of data from anthropology and social psychology to bear on it and he makes an extremely convincing case, and it’s not just that 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, it 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 Danes and Norwegians 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 and had poor economies and poor politics and poor institutions, it’s 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 southern Italy is very, very low and something that you know, sociologists have known about for years, for decades.

So it’s a book that explains all that and it’s just — it’s an amazing read and I can’t recommend the book highly enough.

RITHOLTZ: Interesting, you mentioned he has an unusual background?

BERNSTEIN: He didn’t start at the usual four-star academic background, he started out as an aerospace engineer I think at a state university somewhere, but he did a minor in anthropology and after working in aerospace for a while, you look at his picture and he looks like your typical aerospace engineer you know with the thin, horned rim grasses, he doesn’t have a pocket projector but he should have one.

And he starts doing — he gets a Ph.D in anthropology and he starts doing his research and the research is so remarkably good that he just gradually ascends the academic ladder, first with the University of British Columbia and now he has gotten endowed Chair of Anthropology at Harvard and this enormous team of multidisciplinary researchers under him, you know, psychologists and economists and social psychologists and his work is just absolutely brilliant. Once you start reading the book if you’re academically inclined you’ll get lost in the thick of it, his references, because the references are just so fascinating.

RITHOLTZ: So he is another left brain right brain person who could do both the math and the narrative side.

BERNSTEIN: Yes, and I haven’t mentioned the fact he also writes very well.

RITHOLTZ: 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.

BERNSTEIN: Shucks, Barry, I’m just a simple country neurologist.

RITHOLTZ: (LAUGHTER) 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 a career in either neurology, investing or writing?

BERNSTEIN: Well, the usual admonition to follow your bliss is just awful advice, one of my favorite “New Yorker” cartoon is the typical cartoon where they have a guy with — sitting on the street in shambles with a hat in front of them and the sign says “Followed my bliss” you know, you have to — you have to make a living and the best thing you can do is to meld those two things, you shouldn’t — you shouldn’t take a job that you despise just to make money but on the other hand you know you shouldn’t get a degree in ethnomusicology as well expect to have a happy existence.

You know, you need 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 not have to worry about your next meal.

And the best part of doing that is if you can wind up with reasonable savings at age 40 or 50, you don’t have to worry about what to do with the last 20 or 30 years of your life because you will have whole new careers in front of you and these will be things that you genuinely enjoy doing. So don’t follow your bliss, don’t take a job just for the money, try and meld those two things intelligently and balance them off.

RITHOLTZ: I have to ask since you referenced, what’s your take on the whole early-retirement fire communities that that seems to believe you can save enough money and tap out at — in your 30s or 40s.

BERNSTEIN: It’s a great idea, as long as you don’t get sick or have kids.

RITHOLTZ: (LAUGHTER) So not a fan.


BERNSTEIN: I think the heart is in the right place, I think they are a little delusional and of course, they also ignore you know about the realities of life and I think they also ignore what do you with your life when you go to the beach …


BERNSTEIN: At age 30 or 40, you better have something worthwhile that you want to do with your life, you better have a mission in life because if you don’t, you are going to wind up suffering from industrial grade (inaudible).

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 you living expenses down is certainly a very (inaudible) message.

RITHOLTZ: Fair enough.

And our final question, what do you know about the world of investing today that you wish you knew 30 plus years ago or so when you were first getting started in finance?

BERNSTEIN: Well, you know, academics like to play this parlor game of do equities become riskier you know where over less risky or more risky over time and do arguments on both sides, and most academicians will tell you that they become riskier with time.

But what I — in only fully understood – I’m trapped (ph) or doing it I didn’t understand until after doing finance for a couple of decades was that’s kind of a silly question, the real question is how risky are stocks at a given stage in your lifecycle.

And so if you are retired and you don’t have any human capital left, then stocks are 3 Mile Island Chernobyl toxic, they are very dangerous because you know if you have a bear market and – a bad bear market that is prolonged, you got sequence risk and you may wind up eating Alpo (ph) at the end of the spectrum, if you’re young, there is almost no risk to earning stocks because you’re periodically saving and at some point in your 30 or 40 year saving career, you are going to buy a lot of stocks very cheap and you are going to wind up doing very, very well, and I wish I understood that earlier in my career so I could have been more aggressive earlier in my career.

But you know, as it was, I did fine so I don’t feel too bad about that. But if there is one lesson I wish I have had – I learned, I internalized, it was I could have been a lot more aggressive when I was younger.

RITHOLTZ: 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 390 conversations we’ve had over the past 7 years, you can find that at iTunes, Spotify, wherever you feed your podcast fix. We love your comments feedback and suggestions write to us at, give us a review on Apple iTunes, you can sign up for my daily reads at, check out my weekly column on, follow me on Twitter @Ritholtz.

I would be remiss if I did not thank the crack staff that helps us put these conversations together each and every week. Tim Haro is my audio engineer, Atika Valbrun is my project manager, Michael Boyle is my producer, Michael Batnick is my head of research. I’m Barry Ritholtz, you have been listening to Masters in Business on Bloomberg Radio.


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