Forecasted economic change and the selffulfilling prophecy in economic decisionmaking

Abstract

This study addresses the self-fulfilling prophecy effect, in the domain of economic decisionmaking. We present experimental data in support of the hypothesis that speculative forecasts of economic change can impact individuals' economic decision behavior, prior to any realized changes. In a within-subjects experiment, participants (N = 40) played 180 trials in a Balloon Analogue Risk Talk (BART) in which they could make actual profit. Simple messages about possible (positive and negative) changes in outcome probabilities of future trials had significant effects on measures of risk taking (number of inflations) and actual profits in the game. These effects were enduring, even though no systematic changes in actual outcome probabilities took place following any of the messages. Risk taking also found to be reflected in reaction times revealing increasing reaction times with riskier decisions. Positive and negative economic forecasts affected reaction times slopes differently, with negative forecasts resulting in increased reaction time slopes as a function of risk. These findings suggest that forecasted positive or negative economic change can bias people's mental model of the economy and reduce or stimulate risk taking. Possible implications for mediafulfilling prophecies in the domain of the economy are considered.