As average Americans go about their daily lives, they see and hear economic reports, opinions and news from a variety of sources – many from professional Economists. Are these Economists completely free from all types of all bias? Or do economists tend to lean towards a bias of only good economic news?
Since economics is more of an art than a science (though professional, highly paid economists would probably disagree), there is room for many types of personal bias to slip into the research and results of economists. Generally, economists are susceptible to these types of cognitive bias;
1. Confirmation Bias.
Confirmation bias is the tendency to look for or remember economic information or data in such a way as to agree with one’s opinion, thought or idea. Additionally, with confirmation bias, one tends to interpret unclear and/or unrelated items to support their position.
In economics, an example would be an economist who may believe that raising (or lowering) of corporate income taxes may stimulate the economy – and after the economy does (eventually) recover, the economist will point to the raising (or lowering) of corporate income taxes as the cause (evidence) of the recovery when, in fact, other reasons may exist for the recovery.
2. Normalcy Bias.
Normalcy bias is generally applied to populations in regards to disasters. This type of bias causes to people to either avoid, forget or underestimate the real possibility of a natural or man-made disaster and its effects. What is “normal” today will be “normal” tomorrow and forever. This type of bias prevents people from discussing or preparing for what will (more than likely) occur in the future.
A good example of this bias in economics was the housing crash in 2007 and the subsequent, “Great Recession”. Very few economists, home buyers or governmental officials could see, fathom or predict that home values could indeed fall – and by the amounts they did. As a result, the subsequent severity of the economic disaster seemed to catch most economists by surprise and was completely unexpected and abnormal.
Another example of the normalcy bias can be seen in the current state of the U.S. budget, i.e. the U.S. government has always (or mostly) run on budget deficits, so this is “normal” behavior. Therefore, the U.S. budget will continue to run on deficits forever.
3. Hindsight Bias
Hindsight bias is used by economists, weather forecasters and fortune tellers. It is the idea, that after an event has happened, the person did in fact know and predict that the event would happen, even if they did not. This type of bias often causes confusion and data errors as people try and understand what was said prior to the event, why and on what basis was it said. A general example of the hindsight bias is when, after seeing the outcome of a potentially unforeseeable event, the person will say that they, “knew it all along”.
Economists often use hindsight bias as a way of uplifting themselves or the study of economics by saying that they predicted an event, when, in fact, they did not.
4. Self-gain Bias
Lastly, self-gain bias is usually based in money, fame or power interests. A person may heavily promote a product or service for a fee (monetary gain) when, in fact, the product or service may not be everything they say it is. But because the person is gaining something from using or promoting the product (money, fame or power) they create a bias towards it – and push others to do so as well.
Self-gain bias may create false or misleading ideas, thoughts or conclusions as the person promoting the idea or product is creating a potential false outcome for their own reward or benefit.
Unfortunately, self-gain bias is most common in regards to economists. Many professional economists that Americans see and hear on TV and radio are employed by brokerage houses or other for-profit companies. Though they may not seem to be promoting their company’s product or service, the self-gain bias is still present. And economists employed by non-profit entities and governments also are susceptible to self-gain by indirectly promoting the organization, bureau or company that pays their salary.
As with all things human, economists do suffer from certain bias behaviors. And because of the self-gain bias, and the human trait of general optimism, economists are bias towards good news. In general (most of the time) economists will say that the economy is/will get better, the stock market is/will go up, and tomorrow will be a better day than today. After all, who would buy a stock, financial product or service after being told that the market may crash, the economy might tank and you could join millions of others in the unemployment line?
So be forewarned, the positive bias that economists have towards economic data and outcomes often leads them to miss potential black swans, negative economic signals and evidence of economic decline.