There is a theory in popular psychology called “the wisdom of crowds.” It posits that the average set of predictions from a large group of people is likely to be quite accurate, if not more accurate than the prediction from any individual in the group. The example often given is that the average estimate of an ox’s weight at a county fair was closer to being correct than most estimates made by individuals in the crowd.
With that in mind, our poll today reveals a surprisingly pessimistic tone where 70% believe there will be a recession in 12 months. For believers in the wisdom of the crowds, it is certainly bleak.
The wisdom of crowd theory has often been cited during the pandemic in conjunction with the claim that the public was consistently ahead of political elites in their judgment of the severity of different waves of Covid.
When it comes to the economy, these projections are certainly at odds with expert opinion. While the economic projections for 2022 and 2023 have been revised downwards, they still point to significant growth. In addition, the number of jobs in Ireland, as elsewhere, is now above pre-pandemic levels, at 2.5 million. This difference between expert opinion and public pessimism about the economic situation is evident across Europe where consumer confidence has plunged to levels not seen since the global financial crisis. While economists would no doubt prefer to release projections with a large margin of error, there is no denying this stark difference in optimism.
So, is the audience right? The wisdom of crowd theory, like much popular psychology, often fails to be replicated. When it comes to elections, for example, the crowd is consistently a poor judge of election results compared to opinion polls. This may seem remarkable given the high-profile errors in the polling industry, but in many of these elections the wisdom of the crowds was far more erroneous. And this despite the crowd’s knowledge of published polls.
However, the inconsistency of the wisdom of crowds does not make these numbers any less relevant. More generally, public opinion matters not because the public might be “all-knowing”, but rather because aggregate perceptions drive aggregate behavior that can be extremely powerful.
Going back to the pandemic, a better explanation of “the public being ahead of the politicians” was that individuals perceived something, say an increase in disease prevalence in this case, and adjusted their behavior accordingly. . Taken together, many individual responses halted the progression of the disease long before a political response emerged. Indeed, the political system’s response to the crisis depended entirely on the support it had from the nation, again due to what the public perceived.
The public’s perception of the economy is no less important and just as endogenous to the state of the economy. A number of studies have shown that peaks and troughs in consumer confidence often precede swings in economic growth. While there are of course exogenous factors that determine both confidence and the state of the economy, the behavior of individuals in an economy plays a critical role. From this perspective, our survey indicates that 65% believe that their household financial situation is likely to deteriorate a little or a lot over the next 12 months.
This attitude is likely to lead to a tightening of the belt which will have important ramifications. The sharp rise in economic pessimism has been replicated across the EU in similar studies over the past two months.
There is, however, a reason for this pessimism. In recent work we have done with the Central Bank, in particular with Zivile Zekaite and Garo Garabedian, we have found that on average the public views inflation as likely to be much higher than the expected increase salaries. For the past six months, and long before the war in Ukraine, there has been public concern about the rising cost of living.
It goes without saying, therefore, that a rise in prices without a proportional increase in wages is likely to cause economic difficulties. What was also interesting in our research is that this feeling is more acute among women and people with low incomes.
This of course has political ramifications. The issue remains at the top of the agenda. And one thing is certain, this is starting to fuel political competition. Today, only 40% blame politicians for rising prices, behind Covid-19 and the war in Ukraine, two issues that are gradually disappearing in terms of importance. Just as the global financial crisis was triggered by events in the United States, this will ultimately be the government the public will turn to for protection from the consequences.
Kevin Cunningham is Managing Director of Ireland Thinks