Madness of crowds

“Madness of crowds” is Charles Mackay’s phrase for collective frenzy, used to name a failure of judgment in which investors mistake one another’s rising expectations for evidence of value. In a true market bubble, prices climb because people expect them to keep climbing; when that expectation breaks, the movement reverses into a stampede for the exit.

Meaning and Use

The expression appears in a contrast between ordinary, sector-bound manias and rarer bubbles that draw in investors broadly. Small speculative surges may center on a particular industry, while a full-scale frenzy makes collective enthusiasm seem nearly universal. Mackay’s phrase gives that shared state a memorable name, but the account’s emphasis is not simply on irrational crowds: it identifies the disappearance of the conditions that can make collective judgment intelligent—independence, diversity, and private judgment.

The Bubble’s Reversal

The account describes a bubble as a market in which price and value lose their connection. Rising prices invite the expectation of further gains, and that expectation itself helps drive prices higher. The same collective movement that sustains the ascent turns abruptly when confidence gives way: investors rush to sell, transforming a shared bet on continued growth into a rush for the exit.

Economic Consequences

The phrase also points beyond investors’ behavior to the consequences of their decisions. A stock market channels capital: companies with high share prices can raise more money by selling stock or issuing bonds, drawing resources toward themselves and away from other firms. When collective judgment is sound, companies can put that capital to productive use. In a bubble, the failure of judgment therefore has stakes beyond the market’s rise and fall, because investor enthusiasm helps decide which businesses receive resources.