Forecasted economic change and the self-fulfilling prophecy in economic decision-making

Abstract

This study addresses the self-fulfilling prophecy effect, in the domain of economic decision-making. We present experimental data in support of the hypothesis that speculative forecasts of economic change can impact individuals’ economic decision behavior, prior to any realized changes. In a within-subjects experiment, participants (N = 40) played 180 trials in a Balloon Analogue Risk Talk (BART) in which they could make actual profit. Simple messages about possible (positive and negative) changes in outcome probabilities of future trials had significant effects on measures of risk taking (number of inflations) and actual profits in the game. These effects were enduring, even though no systematic changes in actual outcome probabilities took place following any of the messages. Risk taking also found to be reflected in reaction times revealing increasing reaction times with riskier decisions. Positive and negative economic forecasts affected reaction times slopes differently, with negative forecasts resulting in increased reaction time slopes as a function of risk. These findings suggest that forecasted positive or negative economic change can bias people’s mental model of the economy and reduce or stimulate risk taking. Possible implications for media-fulfilling prophecies in the domain of the economy are considered.

Event-related brain potentials reflect predictive coding of anticipated economic change

“…While playing in the BART, participants encountered economic forecasting by means of a text message on the computer screen, which suggested possible changes (positive and negative) in the game’s economic state of future trials (as in Petropoulos Petalas et al, 2017 ). We recorded participants’ behavioural responses in the game, as well as their electroencephalogram (EEG).…”

“…The increase in risk taking in the baseline may reflect a learning effect, in the sense that participants may be more anxious or careful in the beginning of the baseline block and gain confidence over trials, manifested as an increase in risk taking. Reaction times (RTs) We expected slower responses for successive inflations steps, reflecting higher uncertainty for increasingly riskier decisions (Petropoulos Petalas et al, 2017;Pleskac & Wershbale, 2014). Furthermore, we expected the rate of change in RTs to be steeper for the negative versus the positive forecasting condition, reflecting the increasingly stronger uncertainty in case of a negative economic forecast.…”

“…This finding is consistent with predictive processing models in the domain of action (Friston, 2010;Pickering & Clark, 2014;Ridderinkhof & Brass, 2015), which suggest that people form specific top-down expectations about the outcomes of their actions that serve as a perceptual filter in the bottom-up processing of action consequences (Lin et al, 2012;Melloni, Schwiedrzik, Müller, Rodriguez, & Singer, 2011). Analysis of risk taking over time indicated that participants did not update their false beliefs about the BART economy, which points to the idea that false beliefs higher up in the perceptual hierarchy may be quite difficult to change, especially when the available evidence is noisy or ambiguous (Petropoulos Petalas et al, 2017). Similarly, the state of the general economy may be hard to estimate, given the complex economic indices, and individuals may be selectively processing information that is consistent with their view (Kaaronen, 2018).…”

“…In line with the predictive processing framework, Petropoulos Petalas et al ( 2017 ) recently proposed that economic forecasts may directly influence people’s prior beliefs about the economy and their perception of future economic events and financial decision options. In their experiment, participants played a gambling task (the Balloon Analogue Risk Task, or BART), and while playing, they received a message informing them of possible changes in the BART payoff scheme that might occur in upcoming trials.…”

“…For instance, the anticipation of an economic opportunity or threat may lead individuals to opt for riskier strategies to increase financial profit or to choose safer options with lower payoffs to secure existing resources. Research on economic forecasting is concerned with the effect of expectations on economic decision-making and self-fulfilling prophecies (i.e., economic consequences) that may follow from these expectations (Bovi, 2009 ; Diekmann, Tenbrunsel, & Galinsky, 2003 ; Greenwood & Shleifer, 2014 ; Petropoulos Petalas, van Schie, & Hendriks Vettehen, 2017 ; Wennberg & Nykvist, 2007 ). The field of economic forecasting is part of a larger literature on decision-making psychology that focusses on probabilistic forecasting in various domains, such as economy, weather, and health (Brown, 1973 ; Christensen-Szalanski & Bushyhead, 1981 ; Lawrence, Goodwin, O’Connor, & Önkal, 2006 ).…”