Wednesday, February 27, 2008

Recession: a self-fulfilling prophecy?

Will growing worry over a possible US recession help bring one about? In other words, is the fear of recession a self-fulfilling prophecy? Are we doomed to economic slowdown just by thinking about it?

Well, we're starting off with a lot of question marks here. Let's get down to the answers.

On Monday, we talked about some of the main ideas in Bill Bonner and Lila Rajiva's recent book, Mobs, Messiahs, and Markets, which shows how susceptible the individual can be to the influence of crowd behavior and mentality. We know that mood and psychology can drive manias, booms, and bubbles; can they also drive busts and recessions?

It would seem logical to think so. After all, if social mood and sentiment can fuel a boom, wouldn't the same factors of mood and psychology be at work during the ensuing bust? The boom and the bust are both just different parts of a larger cycle, just as euphoria and despair are the flipsides of human emotion.

But since we're talking about the authors' views on crowd behavior, let's hear what one of them has to say. Markets co-author, Lila Rajiva was recently asked if crowd psychology could affect the onset of a recession. Here's what she had to say:

"Recessions are a result of mood and psychology," says Rajiva, coauthor along with Bill Bonner of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics."

"That statement is true because economics is not driven by only rational self-interest, but by crowd behavior as well. That's why if everyone else is buying a certain stock you want to buy it, too, and that's why if everyone else is panicking and selling because the market seems to be headed south, you panic and sell, too."

"We're human," says Rajiva. "It's hard for us to think on our own when it comes to issues that are difficult to understand. So we listen to the experts who say they know what they are talking about. And since they're saying we are heading for a recession, guess what happens? We listen and stop buying, the economy suffers, and faster than you can say 'self-fulfilling prophecy,' a recession occurs."

This view seems rather similar to the ideas proposed by Elliott Wave theorist Robert Prechter, who notes that market cycles and societal trends are created and driven along by varying tides of social mood and crowd psychology.

Most people would take an opposing view of how financial events and cultural movements unfold; they believe that trends already in force shape or dictate human behavior and social mood. Prechter and Rajiva would argue that mood tends to influence events, or that there is at least some sort of feedback-cycle occurring that causes social mood and crowd psychology to influence trends and economic events, and vice-versa.

Anyway, how does this discussion on recession relate back to the lessons of Bonner and Rajiva's book? Rajiva explains that a knowledge of crowd thinking and its effects could help us to better anticipate the likely outcomes (in this case, a recession) and allow us to prepare and steer through the event with clearer heads.

"I'm not saying that the economy isn't in real trouble right now," says Rajiva. "In fact, the reality is that money problems are likely around the corner for many Americans for some time to come. All of the debt and purchasing on credit we've been doing for years now is about to catch up with us. But because everyone-experts, the media, your neighbors, and so forth-are now screaming that a recession is coming, the mob in us attaches to that viewpoint, and we are closed off from looking for solutions that could help us avoid a recession.

"My hope is that by recognizing how mob sentiment works, at least some of us will start looking for ways to adapt to what's ahead and to find solutions to our problems instead of just giving into panic and turning to the government to save us-something that will only make our problems worse," says Rajiva. "We don't have to walk blindly into a recession. We can take our medicine, and then use our heads as rational individuals to break away from the mob. We can steer our way through the shifting currents rather than head straight for the rocks."

So, Rajiva is saying that by understanding how the crowd works and influences us, we can better understand our own thought process and hopefully step back a bit to think and act with a clearer head. Let's hope she's right, and that more people take note of this idea.

Related articles and posts:

"Fear of recession could help drive one". (Reuters)

"Seven ways mob thinking is making the 'R' word a self-fulfilling prophecy". (NewsBlaze)

"Recession in real terms". (Finance Trends Matter)

"Roubini: US in recession". (Finance Trends Matter)

"Marc Faber, Jim Rogers on Bloomberg". (Finance Trends Matter)

2 comments:

bmbull said...

"Recession: a self-fulfilling prophecy?"

Robert Toll seems to believe so, as he wants to blame the housing industry's troubles on all the 'ceaseless talk of a recession".

David said...

Ha. Didn't catch that one. Thanks, BMB.