Let me raise a purely logical problem with your argument.
(1) You say that "Rampaging emotional crowds cause extreme volatility of returns." (I disagree, but let's leave that aside.) Now, keep in mind that every single member of your "rampaging emotional crowd" is--by definition--an active investor.
(2) You view "(active) investors and markets (driven by active investors) as emotional and bad decision makers."
(3) And yet you say that "Distortions are the ingredients active managers use when creating an investment strategy."
Given that you think active investment is driven by rampaging emotions (rather than rational analysis) and results in bad investment decisions, wouldn't we want to completely eliminate active management?