The visible hand in economics

Analytical bias and “recession fatigue”

Posted on: December 2, 2008

Everywhere I look I am being told that the RBNZ must slash rates into heavily stimulatory territory.  There are calls for tax cuts, infrastructure spending, further unemployment relief.  There are calls that commodity prices will collapse – but the price we pay for things won’t.  Pretty much anything that could be wrong, we’re are being told is wrong.

It is easy to get caught up in this.  All the negative news and statements that the Bank MUST cut between 150-200 basis points makes me feel like “maybe they should”.  Ultimately, you start to feel that they know things you don’t.  This type of analyst is a “fast follower”.

Now pulling back from all this talk, as an analyst I may try to be “objective”.  I may try to forget about these things, and take special notice of the “good things.  Wholesale funding pressures are falling, petrol prices have collapsed, income growth is still strong, and the labour market is still in tight territory.  A little bit of a slowdown is not a bad thing if it helps to clean up the economy.  However, this view is just as wrapped up in subjective feelings – in this case I have heavily devalued the actual evidence of difficulties in the economy, and the fact that a drastic slowdown is never completely in the data till well after the event.  Analysts that suffer in this way are facing “recession fatigue”.

Analysts must try to remember that this inherent biases exist – as by doing so they can help themselves make more objective, and more useful, statements about what is going on in the economy.  Noticing your ideological blindspot will help you to be a better analyst – so don’t hide from it, face it!  If only I knew how😛

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2 Responses to "Analytical bias and “recession fatigue”"

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