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

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.