Opinion: (Professor of Behavioral Economics Dan Ariely, Duke University): “Gut feelings are often wrong…. Because if you think about it, the conditions under which you could develop good gut intuitions are conditions in which you do the same things over and over with very small changes, and you see an immediate effect. …Much of what’s happening in the market has no connection to what you have done, and there’s so much noise into it that it’s really hard for the human being to observe the market and understand the relationship between what you have done, what companies are doing, and what happens.

“You know all these programs when people come the day after something happened and… say: ‘Oh, I knew this all along; here is the story and here is why.’ You have all these pundits who give you an explanation of what has happened yesterday. Of course, the question is if they can predict what will happen tomorrow, and they don’t go there because they know that they can’t.

“We did an experiment in which we took some events in a stock market: IBM stock went up, IBM stock went down, etc. and we created these computerized pundits… which [sometimes] gave the standard explanation, but sometimes they would give the opposite explanation. Then we asked people how much they trusted these pundits… and would they invest in the next period according to their advice.

“It turns out that no matter what explanation they gave, as long as they gave an explanation, people followed them. I think this comes from our great desire as individuals to tell ourselves a story that explains what is happening.”

My Comment: In other words, we don’t care what the causes of the events are; we just need a story, whether it is valid or not. It gives us solace, like to a child in his mother’s arms who wants a fairy tale just because he hears it from the mother. We are looking for solace, not an explanation! But it doesn’t fix the economy!
[51533]

Related Material:
IMF Chief Warns Of Global Catastrophe
It’s Still All Ahead Of Us
Attempts To Mitigate The Blow

Filed under: Crisis, Economy | 1 Comment →