QOTD: Confusing Cause and Effect

Peter Atwater is a socionomist and his analysis is concerned with how moods and sentiment drive market and economic activity. He’s very insightful.

I wanted to share something he did at his LinkedIn blog this week because it’s a really important concept. In discussing the ways in which forecasters fail, Atwater highlights the fact that cause and effect are frequently confused with each other.

This is a really interesting bit:

Finally, one of the major reasons that economists and market forecasters get the impact of major events, like Brexit, wrong is that they view these events as causing confidence levels to change rather than appreciating that they are the result of changes in confidence that have already taken place.

Let me offer an example of what I mean by this.

Most Americans and many experts believe that the banking crisis caused confidence to fall.  Objective data, however, shows just the opposite.  Gallup’s Economic Confidence Index bottomed the weekend Lehman Brothers collapsed and rose after that.  In fact, despite twists and turns along the way, it rose steadily over the next six years.

What people missed – including many experts – was that the failure of Lehman Brothers and other major financial institutions was the consequence of a collapse in confidence not the cause of it.  They had things completely reversed.

I highly recommend you read the whole thing at the link below. And follow Peter on Twitter for more of this sort of thing.


Four Reasons Expert Forecasters Get It Wrong (LinkedIn)

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