Financial and political thinkers are still not entirely sure what to make of the results of the U.K Brexit referendum. In the June 2016 vote, the U.K. decided to officially exit the European Union. Though the transition process has not yet happened, widespread speculation exists about the short- and long-term effects of this move on the economies of the U.K., Europe, and the world at large. The British decision to leave the EU is unprecedented, and the resulting predictions range from minor economic effects that will be smoothed over in a relatively short period of time to true financial devastation. Prominent billionaires including George Soros and Richard Branson have voiced opinions leaning toward the latter end of the spectrum, indicating their predictions that the Brexit vote could result in a doomsday situation for the economy. But what are some of the reasons in support of this argument, and why might they be wrong?

Increase in "Money Anxiety"

Behavioral economist Dr. Dan Geller points to an index that charts "money anxiety" as an indication that troubled times may be ahead. This provides some data in support of the idea that the Brexit decision could be at least one major factor contributing to an impending recession. the index charts consumer spending and savings to measure broad levels of financial concern. In early August of 2016, Geller pointed out that the index stood at the same level as it did just prior to the Great Recession of late 2007.

If the world's levels of "money anxiety" are a representative indicator, it may be that we have not yet experienced the full impact of Brexit on the world economy. Billionaire head of Virgin Richard Branson fears that this is the case, having said Brexit would cause "irreversible damage" to the U.K. Investor George Soros referred to the referendum as a "calamity" capable of causing the EU to "blow apart."

Experts, Bias, and Emotion

We are inclined to believe "experts" when it comes to financial predictions. However, studies have shown that experts are not always able to provide better assessments of future trends than those with less experience. Philip Tetlock, a political scientist specializing in forecasting and decisionmaking at the University of Pennsylvania, has found that a network of assumptions and biases often clouds an expert's predictions. Besides that, an investor who is highly successful in one area may not have particularly useful insight in another area; think of a prominent real estate investor making statements about future hedge fund trends, for instance.

Along with expertise biases, there are a number of other reasons that we can be tempted to make predictions that don't end up coming to pass. Behavior economists recognize the power of confirmation and hindsight biases in our thinking when it comes to investments. Moreover, it is often hard to separate out our emotional reactions from hard facts and evidence.

Though no one truly knows where the Brexit referendum will leave the economy, it is important to keep a level-headed perspective when confronted with a financial prediction, however tame or extreme it may be.

 

 

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