That’s a bit of a pretentious heading - as if I’m qualified to comment on either psychology or economics. However, as an amateur observer of the human condition, it does strike me that a significant component to our current economic quagmire is largely in our head. It seems that while we have transitioned over the years from an agricultural economy to a manufacturing economy to a service economy to an information economy - what we really are is an economy of confidence. When we lose that intangible, psychological element of our collective selves, we perceive ourselves to be in huge economic trouble. And, because we are an information-based economy, we have an amazing ability to measure, calculate, survey, report, broadcast and share our lack of confidence with the world.
But the reality is probably much different from our perceptions. Just as the roaring real estate bubble led us to believe things were better than they actually were, the constant talk about foreclosures, layoffs, and economic “crisis” of all kinds probably has us believing things are now much worse than they actually are.
I liken this to following my favorite sports team: The Wolf Pack of the University of Nevada. I am a huge college basketball fan, and because I don’t live in Reno, I follow my team at a distance, which means - because I am also a geek - I lurk on the main message board devoted to my beloved Pack.
What I see there from game to game is, I think, a microcosm of our overall reaction to economic news. When the Wolf Pack wins, the fans are elated and ready to take on the champs. When the Pack loses, the fans angry, frustrated, depressed, and evidently prone to drown their tears at the local pub. The confidence swing from week to week can be really amazing.
A small losing streak of a couple of games has the diehards prepared to fire the coach, complain to the Athletic Director, cancel their season tickets and commit hari kari. A modest winning streak and the fans have the basketball team back in the Sweet 16. Same team. Same coach. Same talent. Same season. Yet, wildly different perceptions of how good or how bad the team really is.
I’ve learned that you just can’t trust the fans to accurately judge the team’s performance. And you can’t trust the talking heads at CNN, CNBC or the Dow Jones Industrial Average to accurately judge the performance of the economy. In all of these cases, the commentators are biased - one way or another - by the psychology of the moment.
