"The Crowd" by Gustave Le Bon

One book you'll often see on professional trader's list of most highly recommended books is "The Crowd: A Study of the Popular Mind", written in 1896 by French social psychologist and sociologist, Gustave Le Bon.

Le Bon's work contributed greatly to the fields of social and crowd psychology.

You can find a copy of the book in text-file format here: http://www.gutenberg.org/dirs/etext96/tcrwd10.txt

This file is available via Project Gutenberg. The text is in the public domain within the United States - those in other countries will need to consider their own copyright laws. Of course, you can always buy it at Amazon if you're unsure.

It's a little difficult to read in this text-file format, but if you copy and paste the text into a Word doc then it becomes quite readable. NOTE: you'll need to scroll down about two pages to find the start of the book.

Is it relevant to modern day traders though?

Well, I recommend you read it and form your own opinion. I believe the book is well worth reading. If you can look past the sexist and racist (cultural) undertones, which are quite likely just part of the normal prejudices that come with being a 'superior, modern day (1896), intellectual European', this book is quite interesting reading.

Certainly, you can see how the characteristics of crowds and the factors associated with establishment of crowd opinion and belief have played a key role in some of the larger political events of the past century, such as the rise of the Nazi party, and the overthrow of numerous regimes (good and bad). Likewise on a smaller scale such as plays out in any mob riot - one example from my country which comes to mind is the 2005 Cronulla Beach race riots.

From a financial markets perspective, these same factors can been seen at play in both the build-up and crash of market bubbles. Certainly in the most recent two - the tech wreck and the current global financial crisis. And of course there are signs already of the formation of the next bubble - the bailout bubble.

For an investor this book is highly worthwhile reading. And I'd recommended it as well for position or swing traders, looking for the longer term trends in the markets through daily or weekly charts.

For intra-day traders such as myself, at best it's just interesting background knowledge, useful in understanding the factors involved in formation of a much longer-term market bias. But I seriously have doubts as to the influence of crowd psychology on an intra-day trade expected to last a few minutes. For those who trade more like I do, I believe there's much greater value in studying the factors in individual human decision making - human performance limitations such as occur through stress and fatigue, limitations in attentional resources, the influence of our heuristics and biases, and the impact of fear.

While it's a good book, and highly recommended reading, it will in no way get close to my top 10 trading books. To be honest, I'm surprised it's made so many other's lists. Perhaps this is simply an example of crowd psychology at work.

As Le Bon says, "When an affirmation has been sufficiently repeated and there is unanimity in this repetition... what is called a current of opinion is formed and the powerful mechanism of contagion intervenes."

A kind of prestige seems to have developed around a number of historical 'trading related' texts, one of which is "The Crowd". Sure, some of these are classics, but it seems (in my opinion) that so many traders recommend these historical texts, it's become almost as if you feel you have to do the same.

As Le Bon says about prestige: "...till there come to be names and things which nobody would venture to meddle with. For a modern reader the perusal of Homer results incontestably in immense boredom; but who would venture to say so? The Parthenon, in its present state, is a wretched ruin, utterly destitute of interest, but it is endowed with such prestige that it does not appear to us as it really is, but with all its accompaniment of historic memories. The special characteristic of prestige is to prevent us seeing things as they are and to entirely paralyse our judgment. Crowds always, and individuals as a rule, stand in need of ready-made opinions on all subjects. The popularity of these opinions is independent of the measure of truth or error they contain, and is solely regulated by their prestige."

So, while trying to avoid any feeling of having to recommend this book just because everyone else does, I'd say that it is well worth reading if you have the time and are interested in the factors leading to the longer term trends within the evolution of human beings and how that plays out in shaping our political, economic and social landscapes. It won't teach you much about short-term trading though.