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Public Information Affects Individual Decisions During Financial Crisis

April 12, 2017

Economists Jasmina Arifovic and Janet Hua Jiang found that public information, regardless of its validity, can affect how people make decisions during times of financial crisis.

On October 13th, Arifovic presented a lecture on her research as part of an economics seminar series jointly hosted by SCEPA and The New School's Economics Department. Arifovic currently serves as director of the Centre for Research in Adaptive Behaviour in Economics and professor of economics at Simon Fraser University.

Economists have long been interested in whether non-fundamental economic factors, known as "sunspots," can cause or exacerbate financial crisis. Though the concept seems to run counter to the standard economics assumption of rationality, sunspots have been incorporated into important theoretical models of economic crises.

Arifovic's research focuses on measuring the effects of sunspots through controlled experiments. She enlists undergraduates to play a simple game. Given a "bank account" and information about possible rates of return, they decide whether or not to withdraw their funds.

A sunspot is then introduced: a sequence of randomly generated public announcements forecasting how many people will choose to withdraw. When economic conditions are safe or precarious, participants ignore the sunspot. But when conditions are uncertain, they incorporate it into their decisions.

She concludes that in times of uncertainty, behavior is sensitive to publicly available information, even when the information is unrelated to economic fundamentals. The policy implications are clear: public officials and business leaders should pay close attention to the wording of their public statements during times of crisis or uncertainty, when those statement may be more potent than usual.