Who Should You Trust on the Economy? Nobody, entirely.
Common wisdom, even among 'experts', is often shaped by unconscious peer influence. This effect may explain why world economic leaders at Davos 2008 failed to predict the financial crisis and meltdown that followed later that year.
Monday, August 8, 2011 was an unusually bleak instance of that already much-abused weekday. Over the weekend, Standard & Poor had lowered the United States’ credit rating in response to the Jacobean antics in Washington that had led to a last-minute, default-averting Congressional agreement on the debt ceiling – an agreement that was generally seen as a superficial answer to deep structural problems within the U.S. economy. “Stocks Dive as Downgrade Adds to Fears” wailed the front page of the New York Times, accompanied by a harrowing Dow graph and an article about the possibility of a second recession far worse than the first. Each year, the world’s most powerful leaders meet at the World Economic Forum’s annual meeting in Davos, Switzerland to discuss how to remedy challenging and complex global issues. Yet this elite brain trust famously misread the writing on the wall prior to the financial crisis and recession that followed in 2008. And since the meltdown, the media have been vacillating between optimism and despair about the possibility of an economic recovery. Who should you trust? Nobody, entirely; even the experts’ judgment is easily clouded by the atmosphere around them.
In his interview with Big Think, Kevin Steinberg, the COO of the World Economic Forum USA, tells an illuminating story about an interactive workshop performed at Davos 2008, less than nine months before the financial bubble would ultimately burst.
Publicly the atmosphere was jovial and bullish, but privately a good majority of the money managers feared—correctly—a deep correction in the world’s economy. Why weren’t these fears addressed? Did the atmosphere of Davos prevent them from acknowledging the anxieties that most secretly harbored?
What’s the Significance?
“A lot of what we decide is influenced by what’s going on around us” explains Legg Mason Capital Management’s Chief Investment Strategist, Michael Mauboussin. He offers several compelling examples of how our decision-making is unconsciously affected by our environment.
It’s obvious enough that the myopia and volatility of the media powerfully influence investor confidence, day-to-day. And if simply writing down a phone number can alter one’s ability to make a simple estimate, could the insular, exclusive nature of the World Economic Forum be preventing the world’s leaders from acting in the best interests of society?
The lesson from Davos 2008 and Mauboussin is clear: decision makers at every level should cast a wary eye on the assumptions of their peer groups, striving instead to take an independent, historically-informed perspective on current events. This is much easier said than done, but keeping firmly in mind how impressionable we all are is an excellent place to start.