Tag Archives: bias

Reality, perception, and the media’s effect on the economy

For each of us, perception is reality, and drives our behaviors and investments. The media have strong influence over the perceptions of communities, and this drives the net investments of time and money in a community.

It is this net investment of time and money that dictates changes in the economy and the community. So those who produce the information that change perceptions can manipulate the reality of the growth of the community. Is a relationship this general something that we want to foster in our own community? Will it lead down the best path for humanity? A major manifestation of this relationship is the growing value of media. Those who control the media can manipulate the users of it by biasing the information flow. Biases often manifest themselves in analysis and selection of content. It is no wonder that the latest tulip bulb incident centered around the technology and media industries that helped to create that boom-bust. Where would we go if we were not biased? Given all the info and allowed to weigh it as we see fit, we would all more independently perceive the world. The range of individuality would increase, while the volatility of consumer confidence over time would fall because correlations in idiosyncratic confidence levels would fall – affecting every cyclical market. If there is such thing as a risk premium, then people are willing to pay to reduce volatility and are effectively indicating that lowering volatility of cyclical markets would be a good thing.

Is religion succumbing to media as the primary influence in the populations’ perceptions of self and community? And if so, are we replacing one set of biases with another? The most important reason to avoid biases is that they possibly influence decisions away from what is right or best. And the development of the community is optimized when large numbers of unbiased (and rational) individuals participate in decision-making.

We are naturally transitioning toward an environment where individuals have more control over their information. The internet is a strong influence on that process. As the barriers to entry continue to fall in the media space, we will have more and more access to varied information. As this happens, we will see new tools arise that allow us to filter, select, and interpret our information. This is an important process in the evolution of our society, and is a necessary step in the transition toward fairness and truth.

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Irrational exuberance and other drivers of economic growth in the information age

Alan Greenspan, the Federal Reserve Chairman, once labeled the nation’s sentiment as one of “irrational exuberance”, and subsequently tightened monetary policy to prevent an overheating economy. It seems pretty clear, however, that this period of optimism and growth was one of the most important periods of technical and social development in human history. New business possibilities, medical breakthroughs, and communications tools mark this period, and drove the exuberance. I propose that the exuberance is not irrational at all. In fact, I believe that the market was correct to be excited about the potential of recent technological advancements.

Value and growth are not necessarily measured best when viewed in dollar terms, and the period of time when a company commercializes its non-financial value can often be many years. Take Geocities for example. This is a company with negligible financial assets, yet was purchased by Yahoo for more than $5 billion… yes. Was that irrational? Or does Yahoo know something that Greenspan does not? There is significant value in information and habit. Information is the better-than-money bits that translate to utility in the information age. Habit is what brings customers back, and signals the acquisition of and demand for future information.

Ok, then how should the Fed think about economic growth? How should they consider information assets in the optimization model for the welfare of Americans? I think that, for the most part, the financial markets do a decent job of evaluating information assets; we see the widening distribution of P/E ratios in public company market capitalizations as investors placing value on non-financial assets. It is not absurd to think that investors are placing large value on the information assets that do not play a role in the traditional valuation models used for equities. Additionally, economic growth can go up without creating inflation as long as productivity increases enough.

Now that the Fed has loosened rates by a full 1% in less than a month, I think that they are attempting to re-ignite the ‘growth’ that marked most of the 1990s. That is not to say that they are looking to raise the level of the stock markets, or increase economic growth beyond 3-4%, but that they will try to create an environment where technical and social development is optimal. Inflation tends to fall as productivity increases, all else equal. I hope that the Fed begins to use their power to encourage gains in productivity as a vehicle to offset inflation under historically high economic growth rates.