Placebos, Nocebos and Self-fulfilling Prophecies

Yesterday I read an article about something called the “nocebo”. A nocebo is the other side of the more well-known placebo. While the placebo refers to the dummy “medicine” that has a curative impact because the patient was told it was the real thing, the nocebo refers to the side-effects caused by the dummy “medicine” because the patient was told that the real thing sometimes caused those side-effects!

Talking of such self-fulfilling prophecies, I didn’t know that the term “self-fulfilling prophecy” was coined by an economist in the 1940’s! The term was used to describe the scenario where people feel that the economic scenario is bad and hence cut down on non-essential spending which in turn leads to an actual economic slowdown.

And talking of economists, I’ve always wondered why those guys never seem to be able predict an actual recession, let alone a depression. Robert Shiller feels the answer isn’t that economists are dumb. Nor is his answer that the world is too complicated to predict such things. Instead, he feels that central bankers (sometimes) do see recessions and depressions, but decide not to announce it for the reason mentioned: the fear of the self-fulfilling prophecy.

If that were true, it would also explain why no central banker bucks the trend and sets a precedent of calling out a recession before it happens: the first central banker who says that a recession is probable runs the risk of creating panic. People may say a central banker never says a recession is around the corner, so if one is doing so now, imagine how bad things must be!

Feedback loops sure are a good thing in lots of cases, but like everything else, they have their downside too.