(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.) By Edward Chancellor LONDON, Nov 20 (Reuters Breakingviews) - In earlier times, when investors lost their fortunes in the stock market, they tended to abjure speculation. “Once bitten, twice shy” was the rule. Today, animal spirits are no longer dampened by major financial setbacks. No sooner had the so-called “Everything Bubble” imploded in 2022 than it came roaring back. This time, loose monetary policy was not to blame. Rather, it seems that social networks have created ideal conditions for herding behaviour. At the same time, the technology for speculation has been perfected. After the dotcom bubble burst in 2000, investors shied away from technology stocks for years. The Federal Reserve’s loose monetary policy, intended to alleviate the economic effects of the stock market downturn, inflated a housing boom which collapsed in 2008. During the pandemic, even easier monetary conditions, combined with massive government handouts, created the conditions for a bubble in a variety of asset classes, ranging from contemporary art to special-purpose acquisition companies (SPACs). Millions of amateur traders gathered on Reddit’s “WallStreetBets” group to discuss ramping meme stocks such as GameStop and AMC Entertainment . This bubble weakened in 2021 and collapsed the following year, after the Fed raised interest rates. The ARK Innovation exchange-traded fund – which owned a portfolio of risky tech stocks – dropped 80% from its peak in early 2021. In the ensuing “crypto winter”, the price of bitcoin crashed. However, spring was around the corner. Animal spirits quickly revived. While many of the SPACs never fully recovered, bitcoin and the Nasdaq Composite Index of tech stocks soared to new highs. Although plenty of excess liquidity created during the pandemic continued to slosh around the financial system, monetary policy was not the prime driver of speculation. The Federal Reserve’s effective interest rate remained above 5% for between May 2023 and September 2024, yet the stock market powered forwards. Enthusiasm about artificial intelligence was a big factor. But it also appears that social media has fundamentally transformed the way information is generated and distributed in a manner that is particularly conducive to the formation of bubbles, regardless of financial conditions. In his new book, “When Everyone Knows That Everyone Knows: Common Knowledge and the Mysteries of Money, Power and Everyday Life,” the cognitive psychologist Steven Pinker describes how humans arrive at a state of what he calls “common knowledge.” According to Pinker, this concept – also known as public knowledge, shared reality and common ground – allows for people to coordinate their activities. It can be communicated directly by public declaration or indirectly through conventions. Words are a form of common knowledge. So is money: a vendor accepts a dollar bill in payment because she knows that the same dollar will be accepted by others. Pinker believes that the use of electronic media has generated ever wider networks of common knowledge. This seems optimistic. Online communication has helped to turn language into a battleground, where people avoid certain words for fear of being misconstrued. Universities, the traditional fount of knowledge in Western society, are beset by boycotts and protests. As Pinker admits, the ground between facts and righteousness is blurred. Empirically verifiable claims are often suppressed. Conventions break down. Conspiracy theories run amok. Money is drawn into this vortex of disagreement. What constitutes money – fiat currency, gold or crypto? Your answer depends on which tribe you identify with. Another recently published book, “The Digital Reversal: Thread-saga of Media Evolution” by Andrey Mir, presents a radically different view to Pinker’s. Mir, a self-styled “media ecologist” believes that internet connectivity and social media are transforming civilisation. He claims that we are leaving a world of literary culture and returning to an oral culture – what he styles “digital orality” – where electronically communicated sentiments predominate. The old order, Mir suggests, was characterised by the separation of the known from the knower, individualism and a pursuit of absolute truth. The new order involves total immersion in a digitally induced reality and is characterised by tribalism and negotiated truths. In the physical world, the brain was conditioned to seek delayed rewards that required greater efforts, says Mir, while in the digital world “the brain rewires itself, seeking instant rewards for little effort.” Our sense of time has been compressed: “In the digital, one can harvest more responses and status affirmation by being early in a viral connection, as if it were a Ponzi scheme.” Pinker’s utopia of common knowledge, in which groups unwittingly converge on the wisdom of crowds is long gone. Instead, the digital dystopia described by Mir incubates incessant periods of human folly, as described by Charles Mackay in his classic 1841 book “Extraordinary Popular Delusions and the Madness of Crowds.” In this world it is less surprising that Palantir Technologies is valued at around 100 times its revenue for the last 12 months, or that legions of tech researchers fervently attend the imminent coming of superintelligence, a God-like machine destined to rule over humanity. At the same time, it has never been easier to speculate. Apps like the one provided by Robinhood Markets offer real-time trading in stocks and cryptocurrencies at the swipe of a screen. It offers prediction markets for sports and election results – eliding the traditional distinction between gambling and speculation – along with “tokenized equities” tracking private companies such as OpenAI and SpaceX. Customers can leverage their bets with margin loans, options and futures. Robinhood reported 27.1 million “funded customers” as of October with total assets of $343 billion on its platform, an average of around $12,500 per user. Pinker writes that bubbles end when they run out of greater fools and scepticism sets in. He cites fellow cognitive scientist Douglas Hofstadter’s concept of “reverberant doubt,” described as “a cascade, a stampede, in which the tiniest flicker of a doubt has become amplified into the gravest avalanche of doubt.” Brighter people, says Hofstadter, are those who see more clearly than others when there are grounds for fear. They may react early to perceived danger, but at least they escape in time. Those who continue to play the speculative game live by the motto “retire or get retired”, popularised on WallStreetBets. For them, the latter outcome is far more probable. Follow @Breakingviews on X <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Risky investments crashed and then rebounded https://www.reuters.com/graphics/BRV-BRV/znvnqkzzgpl/chart.png As Robinhood Markets’ customer base grew, assets more than doubled https://www.reuters.com/graphics/BRV-BRV/akpejmaadvr/chart.png ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Peter Thal Larsen; Production by Shrabani Chakraborty) ((For previous columns by the author, Reuters customers can click on edward.chancellor.bv@gmail.com)) Keywords: GLOBAL MARKETS/BREAKINGVIEWS (REPEAT)
