Why do people keep referring to the last several years as normal? Over and over again I hear supposed experts on CNBC and other news channels saying things like “normally,” “how things usually are,” or “under normal circumstances” when referring to the economic conditions present over the past several years. I hear the talking heads asking when banks will return to “normal lending practices.”
There is nothing normal about a recession; likewise, a boom phase is equally abnormal. During the boom phase no one asked when the banks would return to normal lending practices.
This is an example of what psychologists refer to as “regression fallacy.” Regression fallacy theory states that individuals are more likely to interpret exceptional events/performance/scores as being average and expect the results to continue. Statisticians refer to this a Regression Toward the Mean.
To illustrate this point consider the following scenario. If XYZ company’s stock shows 80% earnings growth for two years in a row while its closest competitors only show 15% earnings growth over the same period of time then investors are likely to expect XYZ’s earnings growth for next year to be around 80%.
It is important that we are aware of our tendency to make this mistake. If the goal for the economy is to return to “normal” then we must recognize that the last several years have been an exceptional boom, not normal or average.
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Briggs,
It is out of sheer ignorance that media “professionals” who cover econ & finance for a living do this. Bloomberg, BubbleVision, etc. — to all of them this is a mere aberration wherein some sort of dastardly trigger was pulled, outta nowhere, and boom it all went. The bull market/boom is the standard by which everything is now measured. That point has been surgically implanted in every “expert’s” brain, and only highly invasive procedures can remove it. (People forget that Japan’s Nikkei, the index for the Tokyo Stock Exchange, hit an all-time high of almost 39,000 in 1989, and it has trended steadily downward since that time. The index value is at 8,000 today.)
The masses get their education via public schools, television, news sound bites, and idle chat from co-workers, uncles, and dear brother-in-law … so they will never know better than what these people are telling them.
Karen A. DeCoster: “The bull market/boom is the standard by which everything is now measured.”
Isn’t that the truth. The ones that most people rely on to get information perpetuate this nonsense that somehow only booms are supposed to happen and massive bubbles are somehow normal.
Surely the TV commentators have an incentive to regard economic mayhem, bubbles and busts, as normal because without such mayhem they would have little to talk about. They are entertainers.
In every conversation I have about the boom (and bust), I emphasize that one is part and parcel to the other. A money-and-credit induced boom will lead to a money-and-credit induced bust. The euphoria of the boom can not occur without simultaneously setting the misery of the bust to occur.
The only alternative to the little bust is the great bust, hyperinflation and the destruction of the currency. Ionia, Rome, Athens, and many others debased their commodity money. Nearly all historical paper currencies have been destroyed by their issuers. Those States all fell. Much of the economic progress that had been made was destroyed. The apparent inevitability of this happening to the US dollar is what is giving me grey hairs and keeping me awake at night.
heuristic has a great point. The so called ‘information sources’ will almost always present any news or analysis in the most sensational terms possible. Sadly, the same holds for political types. Admittedly this is what will bring in the viewers/voters but it does a great disservice to the very people that are supposedly being served.
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