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Is This The World’s Largest Behavioral Experiment?
November 04, 2021

Is This The World’s Largest Behavioral Experiment?

The driver took them to the entrance of a small, isolated run-down hotel. As soon as the passengers grabbed their bags and jumped out of the van onto the deep, still-falling snow, the driver turned the van around to head back to the city.

But the new guests didn’t find anyone in the hotel lobby. Their host, professor John de Baur, should have been waiting. He invited them on this mysterious retreat— something he did with a select group of intellectuals every year. But the esteemed professor was nowhere to be found.

Not a single employee was at the hotel. The baffled guests found rooms, but each bed only had a single sheet.  The hotel didn’t appear to have heat, or at least, the heat didn’t work. The hotel didn’t have a restaurant, and the kitchen barely had any food.

These guests were among the smartest people John de Baur knew.  But none of them knew they were now part of de Baur’s favorite experiment.  The professor manufactured a series of increasingly adverse circumstances and recorded on hidden cameras how these brilliant people would react in that run-down hotel.  And each year, the professor confirmed his theory that when faced with extreme pressure, people eventually behave irrationally, no matter how smart they appear to be.  Fortunately, none of this was real. John de Baur is a fictional character in Bernard Schinik’s novel, Homecoming.

But psychologists have confirmed that we aren’t as rational as we like to believe.  And economists, like John Maynard Keynes, have long said people also become wildly irrational when tempted by greed.  Keynes coined the term, “the greater fool theory.”  It’s when people are willing to pay an ever-increasing, stratospheric price for something simply because other people are buying it…and that price keeps going up.

That’s what happened during the Dutch Tulip craze in the 1600s, when a single multi-colored tulip bulb could be sold for the price of a house.  It happened during the late 1990s dotcom stock craze, when prices of companies that didn’t earn profits rose to eye-watering levels before they crashed and (often) completely disappeared.  In one form or another, something similar happened to almost every generation.

They provide material for behavioral psychologists to study what Charles Mackay dubbed in 1841:  Extraordinary Popular Delusions and the Madness of Crowds.  In a nutshell, something new grabs people’s attention.  It promises to change the world as we know it.  Marketers talk it up.  Prices rise.  And then widespread madness begins to take hold.

Time will tell, but the cryptocurrency craze might fill volumes of behavioral studies for centuries to come. As I write this, statistica.com reports that there are 6,826 cryptocurrencies. You can see them listed here. That’s more than the number of stocks trading on the New York Stock exchange, the Nasdaq and the Toronto Stock Exchange, combined.

One of them, Dogecoin, began as a joke to poke fun at the wild speculation of cryptocurrencies.  In May 2021, it became the world’s fourth largest cryptocurrency. According to coindesk.com, it was up a whopping 5,664 percent year-to-date, as of November 1, 2021.

As for Bitcoin, the world’s largest cryptocurrency, it’s up 122 percent over the same time period.  It’s priced at about $63,000. Yet Jamie Dimon, the CEO of JP Morgan Chasesays it’s “worthless.”

Warren Buffett calls it “a mirage” and people’s fascination with it, “delusional.” In 2020 he told CNBC, "Cryptocurrencies basically have no value, and they don't produce anything…what you hope is that somebody else comes along and pays you more money for them later on, but then that person's got the problem. In terms of value: zero." Buffett is referring to the greater fool theory.

In such cases, institutional investors often jump on board, not necessarily because they believe these entities are worth an ever-increasing amount of money but because they want to sell these entities to someone else at a higher price.

Perhaps, in the case of cryptocurrencies, someone like professor John de Baur started the ball rolling.  He is watching, recording, and building the mother of all psychology research papers. You might remind me that John de Baur isn’t real.

But he’s as real as Bitcoin’s founder, Satoshi Nakamoto

Just try to look him up.

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