“I can calculate the motion of the heavenly bodies, but not the madness of people.” 
– Sir Isaac Newton

I came across this quote while reading Robert Greene’s latest book, The Laws of Human Nature. Greene has authored many books including The 48 Laws of Power and The 33 Strategies of War. All are excellent reads because they’re well written and Greene weaves history and interesting stories throughout to illustrate his points.

The quote from Isaac Newton came after Greene shared the story of the South Sea Company. In the early 1700s the South Sea Company was supposed to open trade in South America for England. Suffice it to say, their approach was similar to Bernie Madoff’s Ponzi scheme when it came to raising funds. It swept up people across England as they invested in what looked to be a sure-fire get rich quick opportunity. Even the brilliant, rational thinker Isaac Newton fell prey to the madness.

How did that happen? How did it happen again with Bernie Madoff? Why will it happen again? Three big reasons – recency bias, consensus and scarcity.

Recency bias

This is the distorted thinking where we give more weight to recent events than they deserve and we prioritize the present ahead of the future. Over the course of evolution giving immediate, focused attention to whatever was in front of us served humans well. That’s so because most dangers and opportunities were in the moment and needed to be acted upon right away to ensure survival.

Survival isn’t always at stake nowadays but our minds still focus far more on the present than the future. This is why so much importance is put on quarterly earnings by Wall Street. This pressure causes many companies to take actions to satisfy “the street” and investors in the short term but often at the expense of better long-term approaches.

In the case of the South Sea Company it was hard for people to resist investing when they kept seeing the stock price rise and people getting rich…even though the company never actually began trading in South America. Sounds a little like the dot com bust doesn’t it?

Consensus

We’re social animals so it’s natural for us to follow the crowd. This too served humans well when it came to survival. There’s safety in numbers and being part of the group felt more comfortable and safer than going it alone.

We don’t face the same kinds of physical dangers today that our ancestors faced so being part of the crowd shouldn’t be as important. But it is. Studies show exclusion from groups registers in the brain in the same region where physical pain is detected. In other words, there’s very little difference between physical pain and the pain we feel when we’re ostracized from groups.

We still see this mentality today with “hot stocks.” There are always those stocks that everyone seems to flock to which causes more people to flock to them. As this happens stock prices rise even if nothing tangible has been created yet. Sound a little like bitcoin?

Scarcity

The fear of missing out (FOMO) is a powerful motivator to act. Humans are wired to be more sensitive to loss than gain. In Robert Cialdini’s book Influence Science and Practice he quotes social scientists Martie Haselton and Daniel Nettle:

“One prominent theory accounts for the primacy of loss over gain in evolutionary terms. If one has enough to survive, an increase in resources will be helpful but a decrease in those same resources could be fatal. Consequently, it would be adaptive to be especially sensitive to the possibility of loss.”

As people learned about the fantastic gains investors were making with the South Sea Company they couldn’t bear the thought of missing out on their chance to change their lot in life. Many dumped their life savings into the company in hopes of becoming fabulously wealthy.

It still happens today. Bernie Madoff’s stellar investment returns were an example. Smart, wealthy individuals and people with very intelligent investment advisors got sucked in. If those people and someone as rational and smart as Sir Isaac Newton can make the same mistake don’t fool yourself thinking you’re above it.

Conclusion

The wiring of your brain generally serves you well. However, we live in an unprecedented time of change and the pace of change is accelerating rapidly. Your brain on the other hand evolves very slowly and sometimes relying on old mental shortcuts can work against you instead of for you.

Next time something is consuming you, where you sense the pull of the crowd and feel like you’ll miss out if you don’t act quickly, take that as a cue to hit the pause button. If you’ll take time to slow down, consider why you’re feeling the way you are and take a long view, that might be enough for you to make a better, more rational decision. Sir Isaac Newton might not have done it but now you know a little more about the madness of human behavior than he did.