An Ongoing Battle Between Facts and Vibes

Tom Levinson Life with Money

Here’s something curious.

This week The Wall Street Journal published the results of a survey it conducted with several thousand swing state voters. The paper asked about political preferences, naturally, but its questions extended into the survey respondents’ views of the economy.

According to the Journal, about three-quarters of respondents said inflation had moved in the wrong direction over the last year. This assessment was widely held across all seven states – and is in direct conflict with hard economic data.

As the Journal’s Greg Ip writes, “In the 12 months through February, inflation, according to the century-old consumer price index, was 3.2%, compared with 6% a year earlier. Use a slightly different time horizon, or a slightly different measure (such as the index the Federal Reserve prefers) and you get similar results. Take out food and energy – or for that matter look only at food and energy – and inflation is still down… Yet the average person thinks it went up.”

A similar finding cropped up around recent market returns. More Journal survey respondents believed their investments or retirement savings had declined during the previous year – even though 2023 was “a period in which the stock market roared to record highs, home values held steady or rose, and interest on savings went up.”

What’s going on here? Ip sees an ongoing battle between vibes and facts – with vibes apparently pummeling facts.

One way to begin to understand this better lies in the insights of the field of behavioral economics. The research of the Nobel-winning psychologist Dr. Daniel Kahneman, who died last week at 90, poked fatal holes in long-standing economic assumptions about the rationality of human decision-making. Kahneman found that the brain makes quick decisions using incomplete information, often leading to unfortunate outcomes.

As his Bloomberg obituary reported, Kahneman told the American Psychological Association in 2012: “People are designed to tell the best story possible… We don’t spend much time saying, ‘Well, there is much we don’t know.’ We make do with what we do know.” (In a future Life with Money essay, we will delve deeper into the work and influence of Dr. Kahneman and the wider field of behavioral economics.)

Other factors, also part of the behavioral economics landscape, are plausible, too.

Emotional Influences: Our emotions can powerfully shape our perceptions and decision-making. When someone experiences “vibes” – whether positive or negative – about a given something or someone, these emotions can override rational analysis or factual evidence.

Cognitive Biases: Cognitive biases affect us all, in particular the ways we digest information. Confirmation bias, for example, pushes us to gather information that supports our pre-existing ideas or feelings, while discounting evidence that runs to the contrary.

Going With Your Gut: Intuitive thinking works quickly and automatically, based on unconscious processes and memory. We often go with our gut, our intuition, even amid a lack of concrete evidence.

Complexity and Uncertainty: When navigating uncertainty, vibes offer a way through. Instead of sifting through messy, often conflicting facts, we occasionally go with a simpler, quicker decision-making process.

Group Identity: Humans tend to align ourselves with groups, identities, or brands that share certain values or stories. When a particular vibe resonates powerfully within one’s social cohort, the feelings can be reinforced, even though they conflict with objective facts.

For all of us, in ways both observable and unconscious, our behavior is shaped by a constant, complex interplay between our thoughts, feelings, preferences, and incentives, not to mention broader social dynamics. But being attentive to these emotional and cognitive influences – whether they’re related to personal finances, the broader economy, or other areas of life – can help us think more critically and engage more intelligently when encountering both facts and vibes.