Thursday, October 1, 2009

Move over horoscopes, forget cold reading, here is… economics!

Derren Brown, famous British magician, mind reader, and all round deceptive yet entertaining fellow, has often discussed the tricks used by psychics and fortune tellers. One particular method, cold reading, involves suggesting non-specific messages, and letting the subject of the reading provide the meaning to the message.

For example, a psychic using cold reading techniques might suggest that there is an old male, or a dog, or another such subject of emotional connection, and let the subject say something like, “yes, my dog Spot died recently”, to which the psychic replies with something like, “I can feel you have a strong bond with those, human or otherwise, that you share your life with”. Essentially, the psychic says nothing except that you are close to the people you are close to. But the delivery of the message makes it appear that the psychic knows something about you that they couldn’t have – unless they have psychic ability.

I will get to economists under the fold.

The same tactics are employed in horoscopes. They often say such bland and predictable things as “now is a good time to focus on finances”. My question would be – is there anyone to whom this statement does not apply? Those who struggle to save will interpret it as a slap on the wrist for not saving. Those who do save will see it a reassurance that they should be saving. Those who have just lost their jobs will know that they need to tighten their belts for some time, and those that just started a new job will see it as time to make better use of this new source of income.

My point is that the ongoing popularity of psychics and horoscopes is due mostly to our innate confirmation bias; not due to practitioner’s ability to hear voices of the deceased, read minds, or predict the future.

I wonder then, if economists are at the mercy of confirmation bias. Do those economists that predicted a collapse in the share market now get credit simply because the collapse happened - even though plenty of their other predictions did no eventuate? N. N. Taleb, superstar author and one of the few proponents who acknowledge the limits of knowledge due to chance and randomness, has been given enormous credit post GFC for predicting a crisis. But of course even he simply acknowledged that large unforeseen losses occur more frequently than we believe. If no crisis had yet occurred, he may have lived in relative obscurity for some time.

An economist can simply say such things as “Currently the market is rising on the back of new information on housing starts from the US. The bears, however, are looking towards another dip in the market, after a report released today showed home loan defaults rose for the second time this year. The next year could see rocky times for this market.”

Translation: “Things appear both good and bad, depending on your perspective. No doubt, they will continue to do so.”

How could you be wrong when confirmation bias allows the audience to give you credit no matter what happens!

Maybe it is a wise move for budding young economists to take some lessons in cold reading as a career development exercise.


  1. So Cam, is economics:
    a) pseudo-science (e.g. I.D., phrenology);

    b)proto-science (e.g. memetics, evolutionary psychology); or

    c) science (e.g. physics, chemistry)?

  2. Economics is standing at b) and aiming towards c), but unlikely to get there.