Divination and Economics

Today's NPR Planet Money podcast (listen here or transcript here) combines two of my favorite topics: magic (specifically divination) and economics. Essentially they show that the consumer sentiment index does not really seem to predict anything, but some people like to use it because it is so difficult to foresee the future that they'll latch on to anything. It was developed in the 1940s, after WWII, and was ignored until the 1970s, when people worried about--and could not explain--the economy. So as the podcasts illustrates, by beginning with a psychic, people turned to an index that has little or no support, though it has its believers (hmm, where have I heard that pattern before?)

Also amusing to an anthropologist is that the creator of the consumer sentiment index was only able to convince the Fed to ask the questions for his index by telling them they had to ask some polite, "How are you?" type of questions at the start of the survey to build rapport, before the interviewers would go on to ask "How much money do you have?"  So he asked four questions:

1. Are you better or worse off financially than you were a year ago?
2. Do you think the economy will be better off a year from now? 
3. What about five years from now? 
4. Is this a good time to make a big purchase?

He combined these into an index, and voila, an index that we use to this day.  I'm not sure these questions really build rapport, at least in the sense anthropologists understand the concept. I also wonder how much people lie in answering the economic questions. But like all indices, they may ask a silly question but if you ask it every month for many years, it gives a pattern that can be meaningful.  It's just that in this case, no one can decide what it means, though it does help businessmen make decisions. Just like psychics.