The Cat up the Tree, and the World Economy

Usually speeches and papers zip right by the market’s attention. Most economic speeches have a half life of the second or two it takes traders to read the headlines on Bloomberg. And that is already late and stale: the algorithms have already bought and sold several times in the first two hundred microseconds after it hits the wires.

But sometimes it’s worth absorbing things in more depth, to get a feel for the shape of the discussion. The Rethinking Macro Policy conference at the IMF Spring Meetings two weeks ago is one of those things.

If you are looking for conspiracies about the world economy – and plenty do – a high level discussion session at the Spring Meetings is one of the most likely places to find them. In the past the meetings have had to be ringed by police to prevent Occupy and their predecessors breaking in.  Major riots sometimes happen at the Annual Meetings.

So what goes on behind these closed doors? See for yourself,  on open video feed.  The truth is most policy discussion is relatively open now, except in the case of short-run announcements or the need to protect specific sources.

You can be a fly on the wall, with the advantage that you can stop the video whenever you want (and I’ve sat through many very long economic conferences over the years).  You can skip the downright tedious parts.

The upshot is a new humility. IMF Chief Economist Oliver Blanchard wrote an introductory paper with his colleagues , which is striking for its pessimism about obvious right answers.  Even five years on from the crisis, they say, “the contours of a new macroeconomic policy consensus remain unclear.” There is no real chart: policymakers are “navigating by sight.”

George Akerlof (a Nobel winner) explains the state of the world economy like this in one session: the financial crisis  is like a cat up a tree. Everyone has a different view of how we’ll get it down. “My view is the cat is going to fall, and I don’t know what to do about it,” he says.  But at least policy reaction to the crisis has at least been better than predicting it in the first place, as we haven’t got ourselves into another great depression.

But is all the secret stuff conducted in the margins and corridors? There’s little that stays secret for long these days. For example, the Federal Reserve publishes its meeting minutes two weeks later and the full word-for-word transcripts after five years.

Of course, senior policymakers will frequently be guarded in press interviews, for fear of being at the wrong end of a “story”. But you will generally find they express clearly what they think in speeches, papers and other material.

The trick is to be able to understand the world from their point of view, as well as your point of view. That’s much more difficult than looking at words in isolation. The deep secrets of economic policy hide in plain sight, because people as a rule don’t take the time to notice them.



By | April 29, 2013|Central Banks, Crisis Management, Economics, Financial Crisis, Market Behavior, Videos|Comments Off on The Cat up the Tree, and the World Economy

The Gorilla in the Room

The post about healthcare below shows how people can easily pay attention to the wrong things. This is a pervasive problem,  and helps explain why policymakers are so often surprised by sudden shifts in market attention.

The most famous experiment in psychology conducted in the last twenty years relates to this. You’re asked to count how many times the white team passes the ball in this video.

About half the people who watch the video consistently completely fail to notice a gorilla walks through the players and stays on camera for nine seconds. If our attention is elsewhere, we literally often can’t see the gorilla in the room.

It is more than just a matter of visual perception as well. The people who conducted the experiment (inevitably) have written a book about it: The Invisible Gorilla: How Our Intuitions Deceive Us.

The gorilla study illustrates, perhaps more dramatically than any other, the powerful and pervasive influence of the illusion of attention: We experience far less of our visual world than we think we do.  In essence, we know how vividly we see some aspects of our world, but we are completely unaware of those aspects of our world that fall outside of that current focus of attention. Our vivid visual experience masks a striking mental blindness—we assume that visually distinctive or unusual objects will draw our attention, but in reality they often go completely unnoticed.

The bigger lesson is we very often fail to see things we do not expect to see.  Other studies show drivers often hit motorcyclists because they literally do not see them because they  do not expect to see them.

Much like the subjects in our gorilla experiment, drivers often fail to notice unexpected events, even ones that are important.

I’ll come back to this issue of expectations and predispostions another time.

There’s another point here, too. One of the reasons that psychology is going through a boom right now is that its  experiments often turn into vivid anecdotes that people remember far better than mathematical models or statistical tests. The gorilla beats old-style running rats around mazes. In fact, Daniel Kahneman remarks in the video I posted here he believes a major reason his original paper got so much attention was because there were plenty of interesting examples.

The mind finds it very easy to go from the particular, from vivid anecdotes or stories,  to the general, he says. But people don’t like to go the other way and apply general rules to particular examples. They don’t think psychological findings apply to them, for example.  So things like the gorilla story can become so widespread they turn into popular culture legends, which carries its own risk of distortion.

By | March 13, 2013|Books, Confirmation bias, Decisions, Perception, Psychology, Videos|Comments Off on The Gorilla in the Room

Kahneman with more jokes and less pain

Daniel Kahneman’s Thinking, Fast and Slow is one of those things you just have to read. But no time to read, or you just can’t face a 500 page book? There was a superb event in November 2011 at the CUNY Graduate Center which sums up most of his work and life, and there’s a video available for free on the web. David Brooks interviewed Kahneman on stage for about an hour. I was fortunate to see it in person.

Kahneman is self-deprecating and witty. And he also has an amazing life story, including narrowly evading capture as a Jew in Nazi-occupied France during the Second World War. It might not be primetime entertainment (no car chases or reality tv prizes) but it is definitely worth watching.

David Brooks Speaks with Daniel Kahneman from The Graduate Center, CUNY on

By | February 7, 2013|Perception, Psychology, Videos|Comments Off on Kahneman with more jokes and less pain