If you’ve been listening to and watching the financial news lately, it’s likely that you’ve been tempted to go pull all of your money out of the bank and the stock market and revert to the tried-and-true personal piggy bank. Yes, it’s been all doom and gloom on Wall Street lately, and the financial experts and media pundits aren’t afraid to tell us where we are heading: straight into a recession. But the bad (and getting worse) financial situation may not be the only force driving us toward the “R” word. Our susceptibility to mob mentality may be just as big a culprit.

“Recessions are a result of mood and psychology,” says Lila Rajiva, coauthor along with Bill Bonner of “Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics” (Wiley, 2007, ISBN: 978-0-470-11232-8). “That statement is true because economics is not driven by only rational self-interest, but by crowd behavior as well. That’s why if everyone else is buying a certain stock, you want to buy it, too, and that’s why if everyone else is panicking and selling because the market seems to be headed south, you panic and sell, too.”

In other words, our tendency to go with the herd could make a downturn, that is still manageable, turn into a full-blown, long-term recession. The Conference Board—a New York-based research group—recently surveyed consumer confidence and found that it had dropped from 90.6 in December to 87.9 in January. That means more people are tightening their budgets and reducing spending when what the economy really needs is for consumers to put money into it.

“We’re human,” says Rajiva. “It’s hard for us to think on our own when it comes to issues that are difficult to understand. So we listen to the experts who say they know what they are talking about. And since they’re saying we are heading for a recession, guess what happens? We listen and stop buying, the economy suffers, and faster than you can say ‘self-fulfilling prophecy,’ a recession occurs.”

Here’s a closer look at how our mob mentality could lead us to a recession:

 

The experts are steering us toward it.

Here’s the unvarnished truth: The human brain is just not big enough for the big world. In order to think, people are forced to start simplifying and eliminating a lot of the details. They have to abstract...theorize... generalize. “Cogitation on things we know nothing about personally is driven a lot by what others think, especially experts,” says Rajiva. “If experts have a particular squint on a subject, we develop cross-eyes, too. The bee buzzing in their bonnet starts roaring like a sawmill in ours. If gun control is what the experts like, then we find gun control floating in our soup; if the flavor of the month is campaign reform, then we are apt to blame electoral results on evil money rather than dumb voters. It doesn’t matter how untrue a thing is. If enough people repeat it often enough, it soon becomes conventional wisdom.”

 

We’re all about to pay for the fallout from another mob-related phenomenon (the housing boom).

House prices went nowhere for most of the 20th century. They rose only 0.4 percent per year from 1890 to 2004. And in many parts of the country, they went down. Then, from 1997 to 2005, house prices soared, doubling in many areas, setting off a consumer boom. True to the patterns of mob thinking, many people tied a lot of money up in their houses through nontraditional mortgages. But, now falling prices in the housing sector mean homeowners no longer have any equity to take out and spend.

“A 5 percent fall in house prices takes $1 trillion out of the net worth of American homeowners,” says Rajiva. “A 40 percent drop—predicted by many experts—would probably set the economy back about as much as the Great Depression. The International Monetary Fund analyzed home prices in a number of countries from 1970 to 2001 and found 20 busts—when real prices fell by almost 30 percent. All but one of those busts led to a recession. And so the boom that the mob was so quick to get behind is now resulting in a bust that could lead us to a recession.”

 

It’s surprisingly tough to go against the mob.

Not doing what everyone else is doing can be very difficult when mob mentality has taken over. If everyone else is selling their stock because they’ve heard that’s the best thing to do, then it can be hard for individuals to justify holding their positions. You reason, if I don’t do what everyone else is doing, I could lose everything. No one points out that if you do follow the mob, you could still lose everything. You’ll just be in good company.

“It becomes uncomfortable to not go with the mob, because the alternatives the mob presents are made to look so scary. The result is that people think the mob must always be right,” says Rajiva. “It’s much easier to agree with everyone else than to try to be the maverick who points out the flipside or the downside of things. So people choose to believe the scary things they hear on the news, and they react like everyone else. They sell their stocks or stop putting money into the economy and hunker down to escape the winds. Instead, they bring on the storm. By acting with the mob, we fail to do the things that could really protect us and end up bringing on the things we fear.”

 

Oddly enough, it’s less painful to be a loser when everyone else is, too.

“Mob mentality is an amazing thing,” says Rajiva. “Because it makes us feel good to follow along, even when it’s into disaster. It is not so much bad luck we want to avoid as being on our own. Being able to say along with several others, ‘I lost a lot on this or that stock, too!’ is comforting. Why it is that a recession should be less painful if we are all suffering the ill-effects isn’t clear. But mankind is first of all a herd animal and fears nothing more than not being part of the herd—win or lose.”

 

Even people in okay financial shape succumb to mob mentality.

The unfortunate thing is that we listen to the mob even when we don’t have to. Sure, a lot of people are suffering from the subprime collapse, and the bumpy stock market is giving us all the jitters, but plenty of people who aren’t facing financial ruin at all are nonetheless tightening their budgets along with everyone else. That makes it inevitable that consumer confidence will decline even more. “To get the economy back on its feet, we need people to be putting money into it,” says Rajiva. “As everyone from coast to coast keeps screaming and warning of an impending recession, Americans are less likely to make unnecessary purchases and more likely to keep their wallets shut in hopes of saving for rainy and rainier days.”

 

The dollar dump is sure to make matters worse.

As recession fears mount, more people will buy gold when it’s already at historical highs and they'll dump the dollar when it is probably closer to a bottom now than it has been in a long while. When that happens, gold prices will shoot higher and the dollar will crash. People will bring about the very things they fear. Does that mean we shouldn’t diversify our assets? No, of course not. By all means, open a savings account in the Euro or the Yen or Franc; by all means buy some gold. Things could get worse economically, without a doubt. But just remember that more than any single economic factor, loss of confidence in the U.S. is what is most likely to bring on a dollar crash.

“On the other hand, if countries all over the world decide that the United States really is willing to tackle its economic and foreign policy problems responsibly and rationally, and isn’t just going to turn on the spigot of cheap money, you could well see an improvement in the dollar’s health,” says Rajiva. “It’s all about perception, or ‘impression management’ as the sociologists call it.”

 

Groups are less willing to listen to other perspectives.

When mob sentiment rules, the “us or them” mentality takes over, killing any opportunity to discuss issues openly and intelligently. Issues become one-sided, and few people in the “in group” are interested in reviewing evidence that supports any viewpoint other than their own. The marketplace of ideas shuts down, so solutions aren’t found easily—or at all.

“You’ll see this happening now in discussions about how the subprime collapse should be corrected,” says Rajiva. “The rhetoric of class-war between the rich and the poor is going to escalate even though many of the people hit by the subprime collapse were actually affluent investors trying to make a quick buck on risky deals. You can already hear the voice of the herd in the calls for greater regulation of the mortgage industry and for bail out of homeowners facing foreclosure. But the lending scams of the past few years took place in violation of standards and regulations that were already in place. It’s not more regulation that’s needed but more commonsense practices on both ends—the homebuyers and the mortgage lenders.”

“I’m not saying that the economy isn’t in real trouble right now,” says Rajiva. “In fact, the reality is that money problems are likely around the corner for many Americans for some time to come. All of the debt and purchasing on credit we’ve been doing for years now is about to catch up with us. But because everyone—experts, the media, your neighbors, and so forth—are now screaming that a recession is coming, the mob in us attaches to that viewpoint, and we are closed off from looking for solutions that could help us avoid a recession.

“My hope is that by recognizing how mob sentiment works, at least some of us will start looking for ways to adapt to what’s ahead and to find solutions to our problems instead of just giving into panic and turning to the government to save us—something that will only make our problems worse,” says Rajiva. “We don’t have to walk blindly into a recession. We can take our medicine, and then use our heads as rational individuals to break away from the mob. We can steer our way through the shifting currents rather than head straight for the rocks.”