People often believe that the economy is doing worse than officials present because their daily experience (high prices, housing costs, job anxiety) and media narratives are negative, even when macroeconomic indicators look good.
Psychology, inflation 'scars', politics and distrust of institutions are pushing perceptions in a more negative direction than the data itself would suggest.
A book written by a famous economist, Dan Ariely, has recently appeared. The book is called “What Makes Rational People Believe Irrational Things” and argues that people don't simply “believe stupid things”; they are drawn step by step through what Ariely calls a “funnel of mistrust.” This funnel combines emotional shocks, cognitive biases, personality traits, and social influences that gradually reshape how one sees reality.
This text is an excerpt from the “EconoMix” newsletter, which journalist Dan Popa sends every Thursday morning. You can subscribe here:
“Funnel of Mistrust”
At the top of the funnel are emotional triggers such as fear, uncertainty, loss of control, or anger at authorities, which make people more receptive to alternative explanations.
Below, they increasingly rely on alternative sources of information and communities that repeat and reinforce their new worldview, while rejecting mainstream evidence as corrupt or manipulated.
Psychological mechanisms
Ariely discusses mechanisms such as confirmation bias, motivated reasoning, the Dunning-Kruger effect, and our tendency to tell ourselves stories that seem true even when they are downright silly. . A key idea is that “we tell ourselves untrue stories and try to convince ourselves they're true,” and we usually don't realize how inaccurate our own thinking is.
Purpose and tone
The book is not just a diagnosis of the illusions of “other people”; it is intended as a rational explanation of how almost anyone might slip into unbelief under certain conditions.
Prices vs. inflation
Economists focus on falling inflation, but households focus on the price level, which is permanently higher.
Even if inflation drops to 3-5%, people still see rent, food and services 15-25% more expensive than in 2019, so no I “feel” an improvement.
Wages, housing and purchasing power
In many countries, wages have risen, but not always as fast as cumulative price increases, so that real purchasing power for some groups feels reduced.
Housing costs, mortgage interest rates, and rents have skyrocketed, making big life goals (buying a home, starting a family) seem increasingly out of reach, even in a growing economy.
Labor market and insecurity
Official data shows low unemployment and relatively few layoffs, but workers are seeing fewer vacancies, slower hiring and less bargaining power than during the post-pandemic boom.
Surveys show that people are worried about future job loss or declining income, and this fear itself is strongly associated with more negative views of the “economy,” even if they are currently employed.
Media, politics and “negative vibes”
Negative news (crises, conflicts, political fights, company layoffs) is more prominent and receives more attention, which influences people's general feeling that everything – including the economy – is going wrong.
Polarized politics means that people often rate the economy more poorly when their preferred party is not in power, regardless of objective indicators, and low trust in government amplifies pessimism.
The energy level in the body influences decision making
In one experiment, participants who drank a sugary drink made better decisions than people who gulped down unsweetened lemonade.
Researchers Xiao-Tian Wang and Robert D. Dvorak, then at the University of South Dakota, investigated, for example, whether people prefer to get $100 immediately or receive $500 after 100 days. Participants who drank the sugary drink were more willing to take more money later. The pair also found that people are more generous after drinking a glass of sweetened juice than when they drink sugar-free lemonade.
Similarly, when judges make parole decisions just before lunch or the end of the day, they tend to deny the parole application. That's because a decision to grant parole requires more careful consideration and therefore more energy.
“The way you think is inextricably linked to the way you feel physically,” the authors write. So it's important to make sure we (or others we rely on) aren't too hungry or exhausted when tough decisions need to be made.
If you have someone around, things tend to feel easier
The presence of other people affects our perception even in difficult situations. Holding someone's hand while going through a painful event can lessen the pain.
Our social connections seem to play a role in reducing stress, which is why being with someone changes our perception of pain or difficulty, making both easier to bear.
Becoming aware of these influences could prevent us from making costly misjudgments or creating unnecessary conflict with others who see things differently.
Perceptions and realities in Romania
And because it is about perception and reality, the head of the Romanian Banks Association is not very clear whether in Romania decisions are made according to perception or reality. “Because if the perception is far from reality, it means that we are making the wrong decisions. And then I remain faithful to a message, through which I proposed to the Big4 consultants in Romania to calculate a Populism Indicator, to understand what chances we have to discuss from a professional perspective,” says Danescu.
On this road, between perception and reality, adds the ARB executive, it happens more and more often that I, even when I am in a conference or meeting, am informed by my colleagues that we are invited somewhere urgently in the decision-making environment, to discuss how to get some more commissions, how to discuss the profitability of the banking industry, which does not exceed 12%, as Mr. Florian Neagu (deputy director of the Stability Directorate of the NBR).
And we say it as often as we can, explains Dănescu: the return on capital of the banking industry has never exceeded the return on capital of other industries, in fact it was half if we compare ourselves to other industries. Where does this perception come from that in the banking industry profits are high or too high?
“How good it would be to be asked more often what we think, how we see things and maybe what we would suggest that can be improved. At least to reduce this gap between perception and reality,” concludes the ARB official.
A negative and unfair perception has once again been created about banks, coming after the pandemic when banks were the only industry that offered unconditional support to consumers. The world said then: What a big deal the banks are making that they postpone the payment of installments? In fact, the banks no longer collected the monthly installments with which they would have granted other loans. In conclusion, the banks stopped production for a year. Was another industry willing to make this effort for Romanian society?
In response, a higher tax for banks was approved last year. Again there were reactions like: If they are charged extra, it means they have too much profit. We can understand that a turnover tax may be acceptable for a fixed term, not permanently. The condition would be for all industries to participate, including those that are more profitable than the banking industry, but the result was that only banks have this tax of 2% on turnover, given that banks have the most assets in Romania and implicitly a very large turnover.
The impact of this tax may mean for some banks a profit tax that is no longer 16%, but 40-50%. Can you give me an example of an economy where some economic players are taxed with half the profitability? On the other hand, there are banks that do not make a profit, which means that they have an extra charge without making a profit. It is obvious that in these cases the tax will be seen even more in the expenses and in the final price, for consumers.
For example, the banking industry has among the lowest returns. If we relate profit to assets, banks make about 1.5% yield, and the average in the 24 industries in Romania is 7.5%, that is, about 5 times higher than that of banks. In 2022 the return on invested capital was 16.5%, while the average was 24.4% across all industries. Where does this perception that banks earn too much come from?
Sources: https://www.cnbc.com/2024/05/03/why-many-americans-still-feel-bad-about-the-economy-despite-strong-data.html
https://www.alexbrown.com/bdg/resources/2024/05/31/weekly-economic-commentary
Perception: How Our Bodies Shape Our Minds
Daniel Kahneman: Thinking fast, thinking slow
Brookings Institute
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