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Optimistic Beliefs Offer Escape From Recession

Media Release
APRIL 6, 2009

Creating Optimistic Beliefs Could Offer Escape From Recession

Global economies bogged down by widespread pessimism over the current financial crisis should use positive thinking to ‘talk themselves out’ of their negative mindset, new research from The University of Auckland Business School says.

Associate Professor Ananish Chaudhuri of the Department of Economics says his current research – featured in the latest edition of the British Economic Journal - shows economic recessions are often caused by widespread pessimism among businesses and individuals, rather than as a result of inherent systemic problems.

This means that it is possible to create appropriately optimistic beliefs as a key way of tackling such crises, he says. However, success depends on making sure everyone is on the same page and convinced about working collaboratively.

“In combating crises like the current situation, we really need to think of innovative actions or social processes that generate optimistic beliefs,” Assoc Professor Chaudhuri says.

“Getting a message to co-ordinate is not enough. Each person must be convinced that others have received the same message and interpreted it in similar ways. A shared comprehension of the message is absolutely crucial to solving such co-ordination problems.”

Together with researchers from New York University and Rutgers, the State University of New Jersey in the United States, Professor Chaudhuri used economic decision-making experiments to simulate an extreme example of a real-life problem revolving around co-ordinating people’s actions.

He says deep recessions cause economies to get caught in an ‘under-employment trap’ where no firm will expand production unless it is assured that others will do so as well.

This is despite not doing so leading to an outcome that is worse for everyone concerned.

“Such loss of faith, which often tends to be self-fulfilling, can have devastating financial consequences. The question then arises as to how this faith can be restored,” he says.

“For economic leaders to make a difference, the advice they give must be public and common knowledge in the sense that everyone must get the same advice and must also know that everyone else is getting the same advice.

“So if a political leader makes a public announcement that is heard by everyone, and everyone knows that everyone else has heard it, then a necessary condition has been met for successful co-ordination.

“Creating appropriately optimistic beliefs is a key way of tackling such crises.”

END

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