An ancient village witnesses a solar eclipse. No one has ever seen anything like it. The people are worried, and the wise men are summoned. The town waits outside as the wise men confer with the village elders in a council. They emerge and proclaim the conclusion: the town is destined for a great disaster. Everyone returns to their hut, greatly concerned. People dramatically lower their purchases, raising their savings in preparation for the crisis.
Now the local businesses have to lay off their workers since no one is buying their products. The newly unemployed workers have no choice but to cut their consumption even further. Then the firms keep reducing the numbers of their employees, and the vicious cycle continues. The wise men were right! The solar eclipse was indeed followed by an economic catastrophe. The town learns that solar eclipses cause terrible things to happen.Self-fulfilling predications corroborated by post hoc, ergo propter hoc, or false cause fallacy.
The suggestion is that policy guidance and "jawboning" can create self-fulfilling expectations.
Lindau
The economic impact of beliefs
Matthew Wilson | doctoral Student at the University of Oregon
*h/t Mark Thoma at Economists View)
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