To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.
– Paul Samuelson (Sep. 19, 1966), “Science and Stocks”, Newsweek, p.92
Armageddon averted
Economists and analysts have always been a gloomy bunch. Every time the economy improves, they are slow to show support; and every time things go wrong, they make them appear even worse by predicting severe crises and financial crashes. Investors, as a group, are even worse, as they move together in hysterical ‘herds’ which amplify economists’ and analysts’ predictions. But I am not in a position to blame either, mainly for two reasons.
First of all, the human mind suffers from quite a few cognitive biases, which include the availability heuristic and the availability cascade. In short, we continually overestimate the likelihood of something happening when it is closer to hand and we quickly turn such an ill-formed belief into collective wisdom, which often ends in extreme market movements and, sometimes, crashes. Second, you know the saying “people who live in glass houses should not throw stones”? Well, I’m a part-time economist, part-time investor so… you get the picture…
The infinite behavioural biases that affect our thought patterns together with our resistance to change explain the extreme predictions relating to the Brexit result. Such a massive change would surely impact the way people live in the UK, lead to profound economic changes in the country, and challenge 60 years of progressive European integration….
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