“No one makes a decision based on a number.”said Daniel Kahneman, Nobel Prize winner for economics in 2002, who recently passed away. “You need a story.”
What Kahneman says happens in real life. When it comes to the economy, feelings are usually not left aside and question the data when it comes to discussions. Many times they even impose themselves. And if not, ask the many presidents, Argentine and around the world, who have suffered voter disapproval when their administrations have shown better economic indicators not only than those of their predecessors but also those of their successors.
In order not to go so far back in the examples, let’s focus on two current phenomena. One in the United States and another in Argentina.
According to a recent survey by The Wall Street Journal, 74% of respondents in swing states (states where Democrats and Republicans alternate victories at the polls more frequently than in others) believe inflation has moved in the wrong direction over the past year. This means that for them the rate at which prices have increased has not only decreased but increased, which is simply not true. because statistics prove the opposite. Of course, inflation is an average and there may be a person who, if he has purchased a house, will have seen how the price of the property has increased and, therefore, his perception is different from the average. The same goes for the price of some foods.
US President Joe Biden, who is facing a presidential election, logically cannot say that these people are wrong in thinking that inflation will not decrease even if official statistics show the opposite. He would give the image of a person lacking empathy. He prefers to remain silent and move on.
The same could happen in Argentina. Inflation is falling, but the government believes the indices do not reflect what happens on the shelf or at checkout. Economy Minister Luis Caputo tweeted that supermarkets are lowering prices “and they keep them for 60 days” and President Javier Milei, that inflation would be 7% per month without taking into account the results.
There is a difference in magnitude, nature, and sophistication between what happens with prices in the United States and Argentina, which makes the solutions to reducing inflation different in both cases. Now economic policy makers may find themselves faced with something similar: feelings and expectations as symptoms of a broader pessimism disconnected from data.
Why does Caputo have to say that supermarkets lower prices if the consumer notices it? Doesn’t Indec itself say so?
Recent work on inflation by Harvard University economist Stefanie Stantcheva investigated people’s perceptions of inflation. The paper, Why don’t we like inflation?returned the following answers to the question in the title:
– because it erodes purchasing power.
– because it creates a feeling of injustice. Stantcheva found that the incomes of the richest adjust more quickly to rising inflation than those of the poorest.
– because it confirms that companies and employers are reluctant to update wages in line with prices, to ensure they rebuild their margins first.
All this is already known in Argentina.
The columnist of WSJ Greg Ip, who cited Stantcheva’s work, went further and asked where this pessimism that challenges governments might come from.
Could the news be the cause of this pessimism?asks Ip? The media? Without a doubt an interesting explanation for Kirchnerism and for some exponents of La Libertad Avanza.
A recent study in Nature found that each negative word in a headline increases click-through rate by 2.3%. This was true for unemployment in the 1990s in the United States and for Covid-19 in 2020. But it is truer for social media: a Brookings analysis by Ben Harris and Aaron Sojourner suggested that The negative orientation of economic news has intensified in recent years.
However, pessimism, or media resultism as some call it, does not necessarily awaken the same feelings in its readers or consumers. Correlation is not causation, Ip clarifies. “In any case, people consume media that confirms their prejudices and these – especially social networks, with their finely tuned algorithms – tend to give consumers what they want”says Stantcheva.
Kahneman formalized confirmation bias, which is what Stantcheva says: the tendency to see the world as we want it and not as it is. Inflation, country risk and fiscal deficit fall. And the market celebrates. But the pessimism of the market and of some economists due to the delay of the dollar and the impact of duties is still present. And it will get worse. It will take more than a couple of tweets saying prices will drop to change perceptions.
Source: Clarin
