The vanishing point theory of bad economic news

The closer something is to you, the more you care about it and the more you know about it. I've called this the "Vanishing Point Theory of News" before, and for the last year or so I've been testing it on the economy.  Everywhere I go, I ask the CEOs I meet the same two questions: 1) What do you think is going to happen to the economy over the next year? 2) What do you think is going to happen to your own company?

The answers to the first usually range from dark to darker: 1970s recession, Japan's lost decade, 1929, etc.

The answers to the second are invariably brighter, ranging from the private equity guys ("we're sitting on billions of dollars of  'dry powder', and the valuations are now incredibly attractive") to non-financial industries from electric cable to, yes, real estate, where without exception everyone I've talked to thinks their own company is going to outperform the economy.

Now you could say this says more about the people I'm talking to than it does about the country at large. But what if this is actually a widespread phenomena, where most CEOs think they're going to do better than the economy as a whole? (AKA the Lake Woebegone effect?)

(Note: this is not the same as the question the Conference Board asks in its CEO Confidence Survey, which is about absolute rise or fall in profits, not performance relative to the overall economy)

I think you can only draw two conclusions:

1. CEOs are very good at misleading themselves
2. At the micro level, the economy looks better than it does at the macro level.

Either way, it seems clear the closer people are to the facts, the better they tend to feel about the market (with the possible exception of those in the financial sector itself, where what's become clear is that even the experts didn't have a grasp on the facts).

What's most scary about financial markets is how much we don't know about risks and consequences. But as we map the turmoil back to our own industries, we get better at calculating those risks, and this looks less like the Great Depression and more like a cycle, albeit a nasty one, and we actually know how to steer through those.

Thus, the "Vanishing Point Theory of Economic Predictions": in a downturn, the further away an object is, the worse it looks.

Comments

[Uncle Kenny]

"Either way, it seems clear the closer people are to the facts, the better they tend to feel about the market ..."

Unless those people are on the business end of the market correction, e.g. newspaper reporters or autoworkers. Perhaps the insight is really the closer people are to the facts, the more realistic their view of the outcome. CEOs, being essentially cheerleaders, are not reliable reporters in any event.

[MNels]

This is an interesting phenomenon that is not limited to CEOs. Public opinion tracking of Americans shows the same polarized relationship. "Direction of the country" or "right track/wrong track" metrics are bottoming out yet personal optimism remains fairly constant. Or as I interpret it "everything else sucks, but I am still ok".

This is very puzzling. I have wondered if this is the result of the higher degree of control we perceive to have over our own lives and the attendant lack of control we perceive to have over external events.

I see this gap as the primary reason institutional trust is collapsing all around us. It will be interesting to see what emerges from the wreckage.

Should these two metrics ever converge, we would certainly be facing dark times.

[Shaye]

On the off chance that a miracle were to happen and we DID wise up, how would it affect things, in the short and long term?

[Jeremy Miles]

I don't think it's limited to CEOs, it's an optimism bias - . People are fairly consistently over optimistic. People that aren't are depressed - if you had a realistic idea of your chances of success at almost anything, you'd be depressed.

So, to answer Shaye's comment, we'd all be so depressed that no one would be able to do anything at all to respond, and that would be a real disaster.

[Jeremy Miles]

Oh, my comment stripped out my link. Try again.

http://en.wikipedia.org/wiki/Optimism_bias

[Kathleen McDade]

I think most people try to stay positive, even when things are going downhill. Positive thinking isn't guaranteed to save a business, but I think in general it does help (although actually being in denial about your business tanking probably isn't good, if it's really happening).

[Elad]

It's not that CEOs are very good at misleading themselves, it's that an unfortunate part of their job in times like this is to mislead others. They have to take care of morale in their ranks, and by saying "my company is going to do worse than the economy", they'll just make that much more likely to happen, plus they'll most likely lose their job.

[Dan G.]

To expand on Elad's comment, I think there is a strong consumer bias in your informal survey. Chris, you are the editor of an influential magazine read by customers, investors and employees - of course CEOs are going to paint a sunny picture of the future.

It's a very tricky question to answer from a PR perspective - you don't want to sound hopelessly out of touch with a worsening economy but neither do you want to put the frighteners on customers, investors and employees.

The only logical way out of this conundrum is to try to divorce your company's performance from that of the economy at large.

[Anastacio Bueno]

This idea of the vanishing point is actually central to the teaching of history. The most effective, but sadly rarely used, technique is what is called “linking” the past to the present. The best way for all of us to understand the past is to place it a relevant context-the present experience. Short of that, most students will just remember something long enough to pass the exam!
And as we are reminded so many times by people in politics-“forget the past”, “Stop bringing up or living in the past”-as Sara Palin told Joe Biden in their debate.

You see, when our collective memory is eliminated, as Naomi Klein says, we can easily be manipulated. Also, the greater the shock, the less we are able or willing to deal with it because we do not truly understand it-if you do not believe it, look at the re-runs from MSNBC-obfuscation failed them last week! Imagine where that leaves the rest of us.

Most importantly, how many undergraduate and graduate schools provide a comprehensive history of business to their business students? And you wonder about CEO’s being optimistic?
Just read Dan Keough’s, the retired president of Coca-Cola, new book: “The Ten Commandments for Business Failure”.
GAME OVER!

[Parantar]

today is the start of world economy crisis

[yantdani@yahoo.com]

cant trust CEOS. look at aig

[Biazasif]

This psychological defense phenomenon of perceiving our personal situation as not as bad as the bulk of others is also demonstrated with homeowner's perceptions about their home values versus the general market. Dan Ariely has written on this topic at Predictably Irrational and draws upon this survey of homeowner's attitudes and perception.
http://zillow.mediaroom.com/index.php?s=159&item=64
CEOs can be smart. They can be intuitive. But in the end they exhibit the same behavior in a crisis as delusional homeowners.

[Hullabamoo]

It's all about control. A CEO can't control the destiny of the world economy, but can - at least to some extent - determine his company's future.

So fears of world economic doom can be assuaged with thoughts of pushing the sales team harder, supporting innovation and beating competitors.

Whereas the world economy is incomprehensible to most - make that all - people and some of the most dangerous people are those who claim to understand it.

Humans are have a lot of evolving to do before we are able to adequately understand macroeconomics and the multiplicity of other disciplines that should be bundled up with it, from meteorology right through to genetics. Even if a person was capable of grasping all of that information, we can't predict the ethical decisions certain individuals and companies will make.