The herd instinct

In prehistoric times when hunters and gatherers worked together to get food for the table, there can have been no real concept of money. What after all would you use it for? There was no Waitrose then; nor were there gas bills. The more skilled hunters may well have demanded the mammoth fillet instead of the scrag-end in recognition of their skills and there may have been bartering where the neighbour had a particularly desirable stone necklace or flint axe. But the idea of an object representing some sort of abstract value had not yet arrived. There was no system of tokens which could be exchanged for something-else later on. When society became more complex, however, simple bartering was no longer sufficient. In order to allow trade to expand, money was undoubtedly necessary. It enabled you to value something at the point when the job was done or the item sold. You could then carry its value around with you and use it at a later time or in a different place to buy whatever it was you needed. Of course it was originally based on gold. And so the money itself was actually ‘worth' something - everybody recognised its scarcity and so valued it highly. They still do. However, a system of currency does not actually require that coins have intrinsic value or be backed by gold. Which is as well, granted that Gordon sold the majority of ours back in 1999, leaving us with only 300 tonnes of gold, then worth just under £3 billion as against a total amount of currency circulating of about £750 billion. But, the coins and notes we use only have to be accepted by all of us to have the value stated on them for the system to work. And we all unthinkingly sign up to that idea by the acceptance of salaries etc. for the work we do, instead of being paid in legs of lamb or washing-up liquid. We can take our money to the shop and buy turnips or caviar as we choose or we can save it for a rainy day. With money we can all get what we want, when we want it, as long as we all believe in its value. Of course when we lose confidence in its future buying power, as in Zimbabwe, then its value can diminish rapidly. The problems really start, however, when you try to make money out of money. Businesses need money to trade. Big companies need enormous amounts of money to build skyscrapers, roads, ships and planes. Of course they borrow from the banks, but they also issue shares in order to raise the money. The shareholder buys a stake in the company and, in return, the company will pay him dividends, if it is successful. But the shares are themselves a saleable commodity. They can be traded on the stock market. This is where it can all go wrong because it is where the gambling instinct comes to the fore - buying and selling shares in a fluctuating market in order to make a profit on those transactions. No longer is it just a question of dividends in exchange for a capital investment, with the possibility of an eventual capital gain. And so we have millions of people in suits being paid to guess how the value of shares will change, minute by minute, in response to, yes, the underlying value of the company and its trading prospects, but also, just as importantly, to that very strange thing called ‘market sentiment' or what is really just herd instinct. For the market is based only in part on reason. It seesaws between opposite extremes of value based on the wisdom of the crowd - gossip, received wisdom about what will happen in the next few days or weeks. Why? Because as humans that's what we do: we follow fashion, and stock traders are no different; they too follow the herd. We find it very difficult to follow our own path when all around us are acting differently. In connection with the first stock market crash in 1720 - the South Sea Bubble - Isaac Newton said that he could not ‘calculate the madness of people'. Mind you he was probably feeling sore through having lost £20,000 from the crash.  John Maynard Keynes commented, "Markets can remain irrational longer than you can remain solvent". But, despite all the evidence, we seem to believe that we are not really gambling, but taking a reasoned view of our investment.  In times of healthy economic growth, with stocks going up in consequence, it is easy to convince ourselves that the gains are the result of our special foresight. And when markets fall, we are like gamblers who are convinced that just another throw of the dice will reverse our fortunes. It is high time that we recognised that there is no difference in essence between the racing tips in the Sports Argus and the stock-market tips in the FT or between the man in the cloth cap trying to work out the form of the runners and riders in the 3:30 at Uttoxeter and the stock-market traders in their red braces. I would send the lot of them off to Gamblers Anonymous.

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