For my EWOT this week I will be talking about the unintended consequences that may arise from one economist's decision to say in an interview that was on YAHOO's front page that he is guaranteeing that we get hit by a recession in the next couple of months. This is a horrible decision on his part, because it will cause people to make quick financial decisions to their own personal interests. Generally through history a recession has caused the stock market to go down. When it goes down, people lose money, so they try to get their money out of the market before they lose money. By this big time economists predicting a recession, people will listen to him and take their money out of the stock market so that they minimize their losses. This sudden decrease in investments in companies will cause a recession in itself. By this economist predicting a recession he is actually causing one. This is an unintended consequence that could possibly occur from him trying to boost his credentials by predicting/creating a recession.
Here is the URL to the interview
http://finance.yahoo.com/blogs/daily-ticker/going-lot-worse-ecri-achuthan-says-recession-unavoidable-141929160.html
2 points here...we're discussing consumer confidence when we talk about people's reaction to the announcement and you have strong analysis of this.
ReplyDeleteThe other note is one on predictions and modeling. It is much easier to predict that "there will be a recession in the next few months" than to say/predict that all will stay the same or improve in the next few months. If you are right about the recession then you get lots of prestige and fame. If you are right about everything staying as is, no one bats an eye. Think about why Robert Malthus got so much fame for his predictions, whereas someone saying that we'll be just fine got very little attention. This type of doomsday prediction market and thinking is a dangerous thing sometimes