Financial markets as a Le Bonian crowd during boom-and-bust episodes: A complementary theoretical framework in behavioural finance

TL;DR

This paper introduces a macro-psychological framework viewing financial markets during boom-and-bust periods as crowds influenced by collective unconscious processes, enhancing understanding of market instability beyond individual biases.

Contribution

It offers a novel macroeconomic perspective by applying crowd psychology to explain collective market irrationality during financial crises.

Findings

Markets behave as psychological crowds during booms and busts

Collective mental states follow psychological laws distinct from individual biases

Provides a theoretical foundation for macrobehavioral analysis of financial instability

Abstract

This article proposes a complementary theoretical framework in behavioural finance by interpreting financial markets during boom-and-bust episodes as a Le Bonian crowd. While behavioural finance has documented the limits of individual rationality through biases and heuristics, these contributions remain primarily microeconomic. A second, more macroeconomic strand appears to treat market instability as the aggregated result of individual biases, although it generally does so without an explicit theoretical account of how such aggregation operates. In contrast, this paper adopts a macro-psychological -and therefore macroeconomic -perspective, drawing on classical crowd psychology (Le Bon, 1895; Tarde, 1901; Freud, 1921). The central claim is that during speculative booms and crashes, markets behave as psychological crowds governed by unconscious processes, suggestion, emotional contagion, and impulsive action. These episodes cannot be understood merely as the sum of individual departures from rationality, but as the emergence of a collective mental state that follows its own psychological laws. By reintroducing crowd psychology into behavioural finance, this paper clarifies the mechanisms through which market-wide irrationality arises and offers a theoretical foundation for a macrobehavioural understanding of financial instability.