Ulterior Motives

How goals, both seen and unseen, drive behavior

Art Markman is a cognitive scientist at the University of Texas whose research spans a range of topics in the way people think. See full bio

October 17, 2008, Behavioral Economics

Choice and Recession I: The law of small numbers

Experience, not statistics, determines a recession.

It is often said that all politics is local. In many ways, that is because all decision making is local as well. For many years, the United States has used more oil than it produces and has sent great wealth to oil-producing nations. For many years, economists have warned about the dangers of borrowing more money for home loans than can be paid back. Yet, suddenly financial markets are in turmoil. Why the quick change?

Human beings are exquisitely sensitive to rare events that emerge from our personal experience. People smoke without attending to the mountain of evidence about the dangers of smoking until they themselves (or a loved one) actually experience a health problem as a result of smoking. People drive gas-guzzling cars until their own wallet is affected by rising gas prices. People borrow extensively in order to make purchases until suddenly they are faced with significant debt.

Research by Dick Nisbett and Dave Krantz has demonstrated people's heavy reliance on personal experience. For example, they find that people evaluating candidates for a job are more likely to rely on their own experience in the interview with that candidate than on measures like letters of recommendation or relevant test scores or performance evaluations from prior jobs. Even though letters of recommendation and performance evaluations reflect a larger sample of a person's behavior than the small amount of time spent in an interview, people make more use of their own experience than of other evidence.

To be clear, then, the argument I am making is not that the present economic situation is not a significant problem. What determines whether we are truly in a recession, however, is a large amount of statistical data that measures the economy of the country as a whole. What determines whether individuals feel we are in a recession is a much smaller amount of more personalized information.

Finally, it is important to recognize that some parts of an economic crisis can be a self-fulfilling prophecy. That is, believing that there is an economic crisis can change people's behavior by causing them to spend less money and to be more conservative in general with finances. This conservatism can cause slowdowns in retails sales, which then lead to evidence of an economic downturn, which can then cause others to curtail their purchases.