By A Web Design


The psychology of expansion and the psychology of contraction are complete opposites. Expansions occur against a backdrop of increasing trust and social inclusiveness. At least initially, people are industrious and seek to build enterprises and larger social structures. The value of the goals they are working towards outweigh the potential risks, so people try, and succeed, to innovate.

Political aggregations form and grow in both reach and effectiveness as the trust horizon expands and a sense of common humanity trumps xenophobia. Over time, a positive outlook develops into a self-fulfiling prophecy and times typically become relatively stable and peaceful. Unfortunately, in losing sight of risk and hollowing out the substance of society in their latter phase of over-reach, expansions sow the seeds of their own destruction.


The self-fulfilling prophecy in the opposite direction that follows unfolds much more quickly, as trust takes a long time to build and very little time to destroy. The perception of risk makes a major comeback, and as it does so, people become much more cautious, and also much more suspicious of the motives of others. This psychological shift away from innovation, building and longer term goals is a major factor in precipitating economic contraction. Xenophobia returns as the resulting  losses must be shared out. This is much more difficult than sharing out gains during good times when there is plenty to go around. 


The psychology of contraction is a major negative force undermining the achievements of the previous era. It is corrosive of the fabric of society – emphasizing fear, anger, and jealousy. Time horizons shorten with increasing instability, so that constructive planning becomes much more difficult. Far fewer people have enough of a cushion to permit them the luxury of the longer term view, hence short-term crisis management comes to dominate, to the cost of all.


We need to understand the major movements of human herding behaviour that give us expansion and contraction. To understand is to be able to resist being caught up in movements of unfocused anger and fear that can rapidly come to dominate a society in hard times. As circumstances deteriorate, we need to short circuit the progression towards increasing isolationism and tribalism that will only make matters worse.

This can be done by maintaining a focus on that which can genuinely be done where trust still exists. Maintaining communication between likeminded people is crucial. In this way the good ideas and constructive attitudes can propagate, albeit against a significant headwind, and more of the fabric of society may be preserved.

Occupy Movements of Mutual Knowledge


John Vachon Watchers October 1938 Cincinnati, Ohio. “Watching the sesquicentennial parade go by”


In the fields of economics and logic, there are basically two types of knowledge that can be communicated between people. The first one is usually through the use of indirect speech:

1) Individual Knowledge – X knows fact A and Y knows fact A, but neither necessarily know anything about the state of each others' knowledge.

e.g., X asks her dinner date, Y, if he would like to come upstairs to her apartment for a drink. Y is pretty sure he knows what’s really going on, but he doesn’t feel like having a drink and it’s possible that X is just being nice. X is pretty sure Y gets it, but it’s possible that Y is taking her offer at face value. The only thing they both know for sure is that X asked Y if he wanted to come up for a drink!

The second type is typically communicated through the use of very direct language:

2) Mutual Knowledge – X knows A, Y knows A, X knows that Y knows A and Y knows that X knows A (and X knows that Y knows X knows A, etc., etc.)




Mutual knowledge obviously has a huge influence on collective psychology and behavior in complex human systems, depending on the time and place in which this knowledge exerts itself. The Santa Fe Institute for Complexity Studies has recently made availble a video lecture by Alex Bentley, who has scientifically studied the role of “social influence and drift” in collective behavior. I highly recommend readers take a look at Bentley's lecture, which can be found here, but a brief summary will also suffice for the purposes of this article.

“Many explanations of human behavior – even among the 'social' sciences – start with people as isolated individuals, maximizing benefits versus costs. Panics or 'herding' events are often seen as anomalous departures from this norm. I would like to suggest that humans, whose very brains have evolved to handle social relations, are 'herding' much more often than commonly assumed

For a variety of modern phenomena,simple evolutionary models of social influence – or even just random copying – do remarkably well at capturing the large-scale dynamics of popular culture change

Such models offer an explanation for the often unpredictable flux of collective trends, especially in a modern society of unprecedented amount of choice and 'decision fatigue'. By then comparing to traditional societies, where both individual choice and social influence are often better informed, we can better understand how population scale data inform us about human decision-making and the dynamics of behavior change.”

In the modern world of capital markets, this type of social influence and imitation provides the basis for mutual knowledge that can endogenously drive share prices higher or lower, as opposed to independent knowledge of a company’s “fundamentals” being the most significant factor in investment decisions.

e.g., Big-time Trader X tells big-time Trader Y that he and a few other big-time traders are fully invested in a certain stock with vast amounts of leverage, and big-time Trader Y imitates the leveraged investment.

So, while mutual knowledge can be a force that helps blow speculative bubbles amongst the herd, it can also be a force that incites mass resistance to oppression or even some form of revolution. Take the parable of The Emperor’s New Clothes by Hans Christian Andersen, for example. In that story, the child who pointed out that The Emperor “isn’t wearing anything at all” was not telling anyone a fact that they didn't already know.

Instead, hi


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s