I’ve been arguing for years that non-economists suffer from pessimistic bias. They underestimate the recent past, present, and future performance of the economy. A new piece in the Journal of Economic Psychology is consistent with my thesis: When you ask people to estimate the net effect of annual growth in excess of 1%, almost everyone drastically underestimates:
Most participants were dramatically off the mark. Only around 10-15% of the participants gave estimations between 50% less and 100% more than the true value of 238.64%. Furthermore, the majority of the false estimations were systematically below the true value of 238.64%, which was underestimated by 88.9-92.1% of the participants.
Also consistent with my previous results: Experts and men underestimated less.
My question: Wouldn’t people have made the same mistake if the question were about the growth of algae? If so, this paper is primarily about innumeracy, not economic illiteracy.
HT: Alex
READER COMMENTS
Stewart Ulm
Jun 3 2009 at 12:11pm
I don’t see this as pessimism. Isn’t it well-established that most people, even those who regularly work with math and finance, are terrible at estimating the effects of compound interest?
Les
Jun 3 2009 at 1:23pm
My impression is that most lay people are clueless about economics or numbers (although they may believe otherwise), unless they are economists or number experts (such as mathematicians or statisticians).
Since these lay persons appear to be incapable of systematic thought about economics or numbers, it seems to me that there is no purpose to analyzing whether their wild guesses are upwardly, randomly or downwardly biased.
One might as well ask if worms, baboons or turtles make upwardly or downwardly biased forecasts of events.
Harkins
Jun 3 2009 at 1:42pm
If the Bureau of Labor assured me that there would be 1% p.a. growth in the GDP for ten years, I would plan on negative growth. It’s the difference between math and experience.
Richard
Jun 3 2009 at 1:53pm
“Since these lay persons appear to be incapable of systematic thought about economics or numbers, it seems to me that there is no purpose to analyzing whether their wild guesses are upwardly, randomly or downwardly biased.”
The “purpose” of analyzing the systematic bias of laypeople is political science. These people vote. That’s the whole basis of Bryan’s scholarship.
anonymous
Jun 3 2009 at 1:53pm
What question did they ask? 1% growth
annually reaches 238.64% after about 87.423
years.
Les
Jun 3 2009 at 2:14pm
Richard:
Thanks for your comment. But who says the bias of laypeople is “systematic” and what factual evidence supports that view?
Further, it seems to me that “political science” is an oxymoron. If its political its not science. And if its science, its not political.
eddie
Jun 3 2009 at 2:29pm
anonymous: “What is the overall rise in national income within the next 25 years if the economy grows with an annual rate of 5%?” – Click on the “Alex” link to see Alex Tabarrok’s summary, which has a little more information and discussion (including the “rule of 70” and “rule of 72” for quickly estimating exponential growth).
Phil
Jun 3 2009 at 5:07pm
I’d hypothesize that people would be further off with regards to “national income” than algae. It’s not counterintuitive to imagine three or four times as much algae as before, but the idea that national income could increase by 238% in only 25 years? That’s difficult to see without thinking about it awhile.
Also, I’d bet that if you said “GDP” instead of “national income”, you’d get higher estimates. A 238% increase in “income” seems more farfetched than a 238% income in an abstraction called “GDP”.
Finally: suppose that you asked what the “national income” was 100 years ago? I bet the estimates would be too high. I don’t know what the number is, but, expressed in a per-person basis, I bet is sounds way, way too low to live on, even adjusted for inflation.
MikeP
Jun 3 2009 at 6:27pm
This of course has massive impacts on the global warming debate.
Fundamentally, the reason we today should not spend inordinate resources preventing global warming is that wealth grows exponentially, CO2 emission grows linearly with wealth, and temperature grows sublinearly with CO2. The exponential dominates, and we should not take steps that will staunch that growth without really really really understanding what we are doing.
But the average man on the street and even the average climate scientist can accept and understand that CO2 and temperature will grow to be threats while not accepting or understanding that wealth will grow faster to deal with those threats.
Even the IPCC SRES tells us, point blank, that the A1 scenario is expected to yield an eleven-fold increase in per capita GDP over the next century while the more environmentally conscious B1 scenario is expected to yield only a seven-fold increase in per capita GDP.
But few noneconomists, regardless of their degrees, pause to consider what this really means. It is an utter blind spot.
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