THE ECONOMY: IT'S JUST A STORY UNTIL IT HAPPENS TO YOU / by Adam Howard

This week I want to return to a topic I have discussed before:  the mainstream media and the manner in which it "sells" us stories about the economy.

Now, I read a lot.  I look for a lot of data, and I pretty much am a professional listener.  I travel the countryside listening to stories about business, the economy and individual experiences.  Some call this being at the coal face.  Another way to say it is I hear and gather real time data.

Sometimes it feels a little like The Matrix where you have decided to take the red pill, and like Neo, you have disappeared down the rabbit hole and you can see what others are looking for but can't.

I am not going to whinge though.  There are good reasons why this sale by the media works.  Reasons which are actually easy to understand, and that's what we will be talking about today.

Before we go on, let's be honest for a second.  You never see a front page story that says something great happened.  Typically, front page stories are designed to grab the attention.  You can really only do that with something shocking.

But why is that?

Well, one of my favourite economists, Professor of Psychology Danny Kahneman does a pretty good job of explaining why.  He tested the idea of loss aversion and confirmed most people will experience losses twice as keenly as they enjoy a gain of the same size.

Here is a link to some short, 5 minute clips of Danny on some of his hypotheses:

Danny Kahneman on Loss Aversion

So, a loss of $100 by dropping a couple of pineapples on the floor of the local pub while you are pulling your wallet out will hurt twice as much as the joy of winning $100 on a scratchy.

What does this mean for decision making and perception?

Well, for decision making it means that in a situation where a choice needs to be made between two very evenly matched options, most people will choose the option that represents the least perceived risk.  This is usually means choosing the option that maintains the status quo, meaning no change.

For example, in an election between two equally distasteful candidates in an economy that is travelling well, the electorate is highly likely to return the sitting member, as that choice represents the least risk to the status quo.

When considering perception the easiest way to understand loss aversion is how marketing experts use loss aversion to sell to us.  And this is usually by focussing on the frightening aspects of other choices and the perceived risk of loss resulting from those choices.

And this is what the media does.

We are sold stories, particularly about economic conditions, tinged with the risk of loss to each of us.  In tough times they are stories about the Federal Budget, the rising unemployment rate, a downgrading of the State's credit rating, the falling iron ore price.  In good times they are stories about the inflation rate, rising interest rates, skills shortages, off-shoring, overseas workers stealing our jobs.

The fact is our economy is slowing down but is still in pretty good shape.  I keep on writing this, and saying it to anyone who cares to listen (obviously I don't have a big enough audience) but we have reasonably low unemployment, low interest rates, low inflation and a slowly growing economy.

There are definitely parts of the economy that are struggling.  In WA these include:

- junior mining, and oil and gas companies;

- mining services contractors;

- large civil and government contractors; and

- large commercial building companies.

But there are also parts of the WA economy that are recovering and/or travelling well.  These are:

- tourism;

- hospitality and alcohol retailing;

- tertiary education institutions; and

- some agricultural sectors.

But back to why the sale works.

There is a concept known as "self reported well being", based on samples of people being asked the same questions about their subjective opinion of their own happiness levels.  The results are consistent across nations, all resulting in various forms of the following U curve.

To help you interpret the following, the vertical axis is your "perceived" level of happiness as a score out of 10, and the horizontal axis is your age in years.

That's a bit grim, isn't it?  That our happiness levels don't recover to levels experienced at age 20 until we are nearly 75.  

If you google the above graph you will find lots of versions, with some showing happiness levels continuing to decrease until death (Ukraine and Russia), while others show happiness recovering earlier (USA and UK).

One of Danny Kahneman's fans, Paul Dolan, suggests in his book "Happiness By Design" that happiness can be defined as the optimum mix of pleasure and purpose in one's life measured over time.  He also suggests that the mix of pleasure and purpose changes during one's life, specifically because of:

- goal setting in our teens, and the long struggle to achieve those goals; and

- child bearing and rearing that starts in our mid 20's and continues until our mid 50's.

So, if we use the USA and UK as proxies for Australia, or more specifically WA, we have a huge proportion of our population between the ages of 20 and 55 experiencing dipping happiness as they focus on purpose.

Getting a good job and earning an income,  seeking promotions and chasing the goals you set as a teenager, taking out a home loan and buying a house, having kids, upgrading your house to fit your family and sending your children to primary and high school.

What proportion of the population are we talking about?  Well:

The lion's share.  The vast majority of our population are in the dip of the U curve, where their lives are filled with purpose, but maybe not a huge amount of pleasure.  Struggling to get ahead, live in as nice a place as possible, raise good kids, navigate life.

The bottom point of the U curve is when people are about 40 - 45 years old.  Your home loan is at it's largest and you need to maximise your earnings to pay that off.  

Your kids are involved in a lot of activities and you need to be their counselor as well as ferrying them around to all those activities. 

You may even have reached that goal income and come to the crashing realisation that it hasn't made you as happy as you had hoped.  Here is a graph that displays that idea that beyond income of about $75k per annum, there is a sharply diminishing relationship between extra income and extra happiness:

So, we have this large majority of the population, with high income (but who are a little disappointed by how happy that makes them), big home loans, kids and lots of responsibility who are in the bottom of the U curve: low levels of pleasure and high levels of purpose.

And this large majority is also the largest consumer group in the economy; not just of media stories, but of everything.

Due to their high levels of purpose and responsibility, high incomes but correspondingly high commitments, they have a lot to lose if things turn sour.

And that's one theory of why the media is so successful at selling these stories.  It's not a supply thing, it's a demand thing.  There are a huge group of consumers who are craving information about the economy.  Wanting reassurance that everything is going to be OK, and not getting it.  

In fact they are being supplied with the exact opposite.  Frightening information.  News that stokes their fears.

And this is where I refer to the data available and how it is interpreted.  Stories in the media refer to data that is collected, prepared and released by organisations whose sole task is data collection and release:  the Australian Bureau of Statistics, RP Data, Gallup.

This data is used as a prop to sell whatever story is needed at the time, often with limited explanation around that data.

For example, there was a story in April that the Australian unemployment rate had improved from 6.2% to 6.1%.  All the story said was that was good; better than expected.  No explanation regarding why that change might have occurred.  What sectors shed workers?  What sectors took on workers?

Another example is reports recently based on RP Data information that the median house price in the Perth metro area has decreased by about 1.5% in calendar 2015.  Reporting that is just plain lazy.

With minimal investigation you can find sources listing the following results:

- the Cottesloe luxury property market has decreased in value 30% since 2012;

- that the suburbs between Fremantle and the Kwinana Freeway have risen by more than 10% each over the past 12 months.

So, my points are as follows:

- the mainstream media is a blunt instrument that reports broadly rather than specifically, and often uses out of context or misleading information;

- the data used as a basis for much of the current reporting is often 3 to 6 months old and can't really be regarded as useful; and

- there is a growing demand for information on micro economies and property markets, but no providers of this information.

After all, stories about the economy, whether about it's ass falling out or it shooting for the stars, are just that: stories.  Until or unless they happen to you.

Any regular readers will know I am a huge fan of digital technology and the growing capability to gather data and interpret it in much shorter time frames than has historically been possible.

And this type of micro market reporting is an opportunity begging for someone to take it up.

Now, at present, the best freely available data on the labour market and the property market are contained on the following sites, both of which contain aged data and are macro in scope:

Australian Labour Market Portal

REIWA

Imagine if you could freely see numbers showing hiring/firing trends in your market segment in your city over the past month.  

Imagine if you could freely see weekly trends in property listing numbers, asking prices and sale prices all via one database.  

Now that would be perfect information.   That would provide food for thought....