Rhetoric and the poverty effect
Behavioral economics explores the psychological dynamics of decision making, veering away from the classical approach of optimization that presumes perfect knowledge of markets, and arriving at rational decisions solely based on quantitative formulas. Real life decisions are influenced more by emotions than the traditional economists allowed in their construct of “homo economicus.”
One psychological phenomenon in economics is the effect of rising stock or property prices on individuals who may have these two items in their investment portfolios. This individual is apt to spend money he doesn’t yet have simply because he feels richer from his paper profits. His stocks are up. His proprietary share is worth more. And the value of the house he lives in is rising.
Economists explain the increase in consumer spending in a bull market as the “wealth effect.”
When yet unrealized profits accumulate in one’s stock portfolio, the feeling of wealth sets in, even when the cash from selling the assets have not come in. This leads to consumer exuberance and spending on cars, condo units, couture clothes, jewelry, and foreign trips. The feeling of being wealthy can drive consumption, even when fueled by bank borrowings and credit cards, all on the presumption of cashing in eventually on the rising value of one’s assets.
What if the stock market is on a downward trend and seems to be looking for lower levels of support, do investors feel poorer and experience an opposite “poverty effect?” Will the investor sell in a panic and cut his losses? Even when he cashes in, he will still feel poorer. His reference point is the peak of the market, when he could have sold. There sets in a version of “seller’s remorse” — should have sold sooner.
Signs of the poverty effect, whether psychological or real, are hard to miss. Expletives are being noticed. Are the “oral sects” bothered by the presidential rhetoric and verbal thrusts at leaders of countries at the top of the investor lists? Is the assertion that words even from the top can’t sink an economy verifiable? (We have a viable ten-point economic program.) Is a promise to God after hearing His voice not on a burning bush but on the plane home with drowsing co-passengers from a state visit going to keep the rhetoric more subdued and scripted?
Is investor confidence taking a “wait and see” attitude, meanwhile keeping cash on the sidelines?
Purchases are being postponed waiting for better times. Christmas spending is moved closer to the holidays themselves, and the gift lists are shrinking as well as the budgets for them.
Luxury items are being deferred for better times. Are car sales feeling a slight pinch, selling mostly the lower end for Uber buyers?
Is there a way to shake off the feeling of uncertainty causing the poverty effect? A recent survey shows an improved optimism in business. It is not certain whether this brief burst after elections coincided with the short bullishness before the mouth that roared.
Preventing a poverty effect in taking root entails showing more than GDP numbers and the usual economic metrics like inflation under control. The new ones under the new dispensation still have to be reported. There is an emotional component similar to a recently wealthy individual feeling comfortable in his new house. It’s a sense of belonging to the club of successful emerging economies. Maybe, a surge in tourism from the marketing efforts of the new person in charge can do the trick. Throwing the dice on the beauty pageant effect is still doubtful.
Setting aside perhaps eight weeks for media to highlight only positive news in a novel type of enterprise reporting can be tried. A daily dose of good news, even if inherently boring, can start us believing that things are finally going right. The wealth effect need not be material, it can start with the spirit of celebration — an economic EDSA of the middle class believing in the country again. Coverage of media can shift away from his own words to what’s going on in the economy.
It means changing the dominant news narrative from pre-departure and arrival speeches to infra projects in the pipeline.
Isn’t it time to introduce the effect of optimism in promoting self-fulfilling prophecies? Maybe the hoping mechanism can be as powerful as the wealth effect. Self-delusion on what is possible and what he is not saying can usher back the wealth effect.
Is investor confidence taking a “wait and see” attitude, meanwhile keeping cash on the sidelines?