Self-fulfilling prophecy

“Read this as soon as possible. Get out of the disaster right away.” “Aftershock,” a book published early this year, proved extremely provocative. The authors are brothers David and Robert Wiedemer, two economists who gained fame for predicting the 2008 global financial crisis in their book, “America’s Bubble Economy.” They said in “Aftershock” that the 2008 crisis was only the beginning of the real upcoming crisis, and that the worst-case scenario will be realized with the freefall of all assets ranging from the dollar, stocks and real estate.

In economic, a “self-fulfilling prophecy” refers to the phenomenon that the ups and downs of companies, national economies and stock markets are subject to what people believe. A case in point is the run on Korea’s savings banks. If a savings bank is rumored to be non-performing, people rush to withdraw their deposits and the bank does indeed become non-performing, though it was healthy. What the Wiedemers warned -- that people should turn all their assets into cash for the upcoming crisis -- could end up as a self-fulfilling prophecy.

A self-fulfilling prophecy is more powerful in bad times than in good. Behavioral economics explains that people naturally want to avoid loss. They feel more pain in losing a dollar compared with the pleasure of winning a dollar. “From the perspective of evolutionary theory, people suspend spending when they feel insecure,” said Rudy Kazuko, a Japanese marketing expert. “Even Capuchine monkeys are more sensitive to losing than winning something when the future is uncertain. Anxiety and loss aversion function in the same spot of the brain,” Kazuko said in his piece, “Why Don’t Anxious Monkeys Buy Goods?”

The New York Times said Monday that U.S. consumer anxiety aggravates the economy in the face of plunging stock prices. “People sit on their wallets because they feel like everything is going to get worse, and things get worse because people are sitting on their wallets,” said Paul Laudicina, chairman of the consulting company AT Kearney. The passage of the debt ceiling bill by Congress was a good sign but stock prices plummeted. Players in the Korean financial market, which tends to be easily swayed by a move, should not give in to a self-fulfilling prophecy because of groundless anxiety.

Editorial Writer Chung Sung-hee (shchung@donga.com)