Robert B. Menschel Economics Symposium

Tuesday, June 14, 2022

The 2022 Robert B. Menschel Economics Symposium discusses the current state of inflation in the United States through the lens of behavioral economics, including how public perceptions might contribute to rising inflation rates. The full agenda is available here.

The Robert B. Menschel Economics Symposium, presented by the Maurice R. Greenberg Center for Geoeconomic Studies, generates critical thinking about the consequences of herd mentality behavior in global economics. This symposium was established in 2014 and was made possible through a generous endowment gift from Robert B. Menschel while a senior director at Goldman Sachs. Since Menschel’s death earlier this year, the symposium continues in his honor and memory.

In-Person Keynote Session: A Conversation With Meir Statman

Meir Statman will discuss how cognitive bias can exacerbate consumer concerns in an inflationary environment.

Richard Haass

HAASS: Welcome one and all to today’s Council on Foreign Relations symposium, named for Robert B. Menschel. This is our seventh annual Menschel Symposium. But, alas and sadly, it’s the first not to include Bob, who passed away two weeks ago. Many people in this community know him well—or most for his five decades at Goldman, but he was something of a renaissance man. He was a dedicated leader of many civic and cultural organizations, and a great photography collector. And his philanthropy ranged far and wide from medicine, to education, to criminal justice, but, obviously, also to the Council on Foreign Relations. And since joining this organization fifteen years ago, Bob contributed consistently and generously to our annual fund, and then his gift here to establish the symposium in his name was transformative because it really allowed us to expand what we do in this realm of geoeconomics.

Bob was not just generous, but he was informed and wise. His book, Markets, Mobs, and Mayhem: A Modern Look at the Madness of Crowds is unfortunately as relevant today as it was when he published it. And it really is an interesting read about the breakdown of—and breaks down the phenomenon of crowd psychology and it effects.

The symposium will continue here in his honor and in his memory, and it will continue to generate critical and creative thinking about the consequences of human behavior in economics. In recent years we have addressed all sorts of important issues through the lens of behavioral economics. Last year’s event on the pandemic included a keynote from Richard Thaler. We also had Cass Sunstein one year and Abhijit Banerjee in another.

This year I wish we were less timely, but, unfortunately, we’re going to focus on inflation—you may have heard of it—and how bias can actually make bad situations worse. So again, it would be harder to be more timely and relevant. The only really bad news is because of the subject, since I’ve begun speaking the market has fallen another twenty points, so there we are.

We’re in good hands. We have Meir Statman, the Glenn Klimak Professor of Finance at Santa Clara University to keynote us, and then he is going to be in a conversation with our neighbor, Gillian Tett, of the great, and wonderful, and essential Financial Times. So Gillian, Meir, over to you. (Pause.)

TETT: Well, good afternoon, and welcome to everyone who is both joining us in person in this room, but also online. And I do know that there are a lot of online watchers, and so I want to urge you, as we go through this discussion, if you are watching online, do feel free to ping your questions over. And if you are in the room, wave at me when the question time comes.

I’m Gillian Tett. I’m with the Financial Times. And I can tell you that from my position at the Financial Times, I would echo Richard’s point about this being an incredibly timely topic right now. It’s top of many Americans’ minds; it’s top of the White House mind. And that topic, of course, is inflation.

I should say it’s also top of the news cycle, and before I came here, I was actually on the Andrea Mitchell show at the very top of the hour talking about inflation and about the political headache it is now presenting to the president. And that’s no surprise because the raw numbers we’re getting out right now are pretty shocking. Whether it’s the five-, six-dollar-a-gallon gas prices we’re seeing at the pumps, which could go even higher; whether it’s the 1 percent increase in the consumer price index we saw last month—that’s a monthly figure; whether it’s that we’ve seen inflation hovering around 6, 7, 8 percent, depending on how you measure it, which is four times the Fed’s target; the raw numbers are frightening.

Bur what Professor Statman is going to be talking to us about today is a rather different—importantly different take on inflation that everyone needs to know about, and that goes beyond the numbers to look at the psychology and sociology, if you like, of inflation. It is an aspect which has often been ignored in the past because, of course, in the second part of the twentieth century, economics really was a game, mostly about numbers, and math, and models, and equations, and algorithms—often seeming more like a branch of physics.

But Professor Statman is one of those who has built much of his career challenging the conventional thinking in economics, even—or especially—when challenging it was very, very unfashionable. He is a behavioral economist—behavioral finance economist one might say—who has looked repeatedly at a topic which is very dear, of course, to the heart of the person who is sponsoring this whole symposium, Bob Menschel, which is a question of why markets go mad, why people go mad, how mobs can misunderstand or misreact to numbers, and why it matters so much, and why it creates mayhem.

So thank you for being with us today. You have an amazing perspective to offer on today’s problems with inflation because one other aspect that I forgot to mention but I actually want to start with is that it’s very hard right now to get many Americans to think that there is a world beyond American shores, and when it comes to inflation, people are thinking right now, well—they’re looking to American history about inflation as panic and terror about what’s happening here. But you have studied this internationally, haven’t you, and you looked for many years at what happened to inflation in Israel, which is very relevant.

Tell us a bit about your background research in respect to that, and then we’ll get on to talking about Biden’s problem later on.

STATMAN: Thank you, Gillian, and good afternoon to all of you. Well, as you can tell from my accent, I’m an Israeli by origin, so it is not so much that I studied inflation in Israel; it is that I’ve lived inflation in Israel. And so did my family.

And so inflation today in Israel is around 3 or 4 percent, which is the envy of all of us here. But it was not always like that. So in the early ’70s, inflation was around 15 percent and then it started to ramp up and got into three digits, and then by 1984, it exceeded 400 percent. Let me repeat that: 400 percent. The joke at that time was that it is cheaper to take a taxi from Jerusalem to Tel Aviv than a bus because when you board the bus you pay then, whereas in a taxi you pay only when you leave it, and you leave it an hour later when the currency had depreciated.

But of course inflation was no joke in Israel, and people really resorted to very wasteful ways to combat it. One was—even though salaries were generally linked to the price index, people, as soon as they got their pay, they would go out and buy whatever canned goods they had, meats that can be refrigerated, and so on. But one of the—eventually somebody had to tap the brakes—or slam them. By then the banks in Israel created what is really a Ponzi scheme to offer Israelis something that would hedge, that would protect them from inflation, and then it blew up, and they were all nationalized, and so on. So there were really quite substantial, painful effects, both to individual citizens and the financial system.

But one of the things that Israeli did to cope with inflation was to price pretty much anything of value in U.S. dollars, and so houses, surely, automobiles, but even cheaper things were priced in dollars and then paid at the exchange rate of the day. In the process, Israelis neglected the fact that there was inflation in the U.S. as well, and in the early ’80s or ’79, it reached double digits.

And so the general point here is that people need a yardstick to do their accounting. And they knew that the Israeli lira at that time was not a good yardstick, but they needed something simple like the U.S. dollars. And they treated it as if there is no inflation there—as if it is like a yardstick that is always three feet, never moving to four feet or two feet.

And so there is something that we call money illusion, that generally we ignore inflation; that is, we do our accounting in the form of, say, did you get a raise, or what happened to stocks in nominal dollars rather than in real dollars that are adjusted for inflation. And that works really well when inflation is low—2, 3, or 4 percent.

If you think about it, why is it that we do it in nominal dollars rather than in real dollars? Well, the answer is that it is simpler. It requires what we call System 1 rather than pausing and asking. And if you think about, say, the pricing of $2.99, well, it doesn’t take a lot of brain power to realize that $2.99 is three (dollars), and once you add the sales tax, it is more than three (dollars). And yet the fact that retailers continue to price in $2.99 style tells you that they know quite well human nature, and they know that people are going to look at the two and stop there, and not do that anymore.

But when—and so you can see—you can ask yourself, why is it that the Fed is aiming at 2 percent inflation? Why not at zero percent inflation? And the answer really is that 2 percent kind of can cover sort of things. So when I get a raise from one hundred thousand (dollars) to one hundred and two (thousand dollars), I’ve got a 2 percent increase. Inflation is, say, three percent, so in real terms I’ve actually lost 1 percent, but that does not fully register.

TETT: Right.

STATMAN: And so we have to—we have to see what happens. Once inflation gets to be at 8 percent suddenly from being invisible, it becomes the center of attention.

TETT: So—I mean, this is fascinating and very important. I must say looking at Israeli history certainly puts President Biden’s problems with inflation into context right now. If you think it’s bad; it could be much, much worse.

But you’ve identified four specific emotions or things that happen in our brain in relation to inflation that create the biases that shape how economies react, don’t you? I’m just looking at the list: fear, availability, confirmation, and representation. Do you want to just tell us quickly how those four key words impact—or should impact—the inflation debate?

STATMAN: So let me begin with cognitive shortcuts and errors that System 1—that quick thinking serves us extremely well in most circumstances.

TETT: And that’s the system where—that Danny Kahneman—


TETT: —and Tversky made so famous with thinking fast, thinking slow—

STATMAN: That is right.

TETT: —for anyone is not up on their Israeli psychology professors, so yes.

STATMAN: Yeah, it is—it is our intuition, and sometimes, of course, that intuition is misleading, and then we have to engage that System 2 of systematic, scientific-based thinking.

So if you look at a cognitive shortcut like availability, if we are asked to judge the likelihood of something—the likelihood that a plane—God forbid—will fall from the sky, we call on what is available to our memories. And so you wouldn’t be surprised that, after one of those terrible accidents, the likelihood in people’s minds goes higher.

So what happens with inflation? Think about what happens with gas prices. You drive by gas stations all the time. They have, in giant numbers, gas prices, and so they are very available to our minds. And so we tend to rely on these and exaggerate the overall inflation, thinking that everything has gone up by 30, or 40, or 50 percent. So that is one of the problems with availability.

Now of course reading it in the paper makes it also available. It is not in page seventy-two; it is right there at the very top. And so, again, it makes it available to our minds. And of course there are people who are very eager to make it more available; they are called politicians. So that is—that is one. And so what we tend to do is look at those prices we kind of know, that we purchase frequently, and judge from them. And we tend to bias it upward; that is, we are more likely to see those that have gone up than those that stayed the same or went down. So, you know, I know that my favorite yogurt at Trader Joe went from $1.99 to $2.49, and now $2.99. And so it seems like a 50 percent increase in a very short period. But of course, not everything has gone up at that level. So that is one of the things that we have to remember and kind of pull back, and not become overly scared.

TETT: So in practical terms, what does this mean for the White House right now? I mean, should they be changing their messaging on inflation? Should they be trying to persuade voters to look at it differently? Should we all be changing our mindsets?

STATMAN: Well—(laughs)—if only it were so simple. You know, there are some things that are easier to explain than others, and there are some things that touch us more than others—that is, if you lose your job, that’s comedy, but if I have to pay a dollar more for gas, that’s tragedy. And so inflation touches all of us, and so people just resonate to it. And again, because we lose that sense of benchmark that I can rely on a dollar to represent real money, that really makes us very uneasy, very nervous. And so you can try to explain it, but it’s kind of like trying to explain with the language of standard finance. You know, you can perhaps have it in a journal, but it just does not go in the world of public policy, politics, and so on. That is too bad that our intuition is such that appealing to it is easier than to explain it in a way that economists might.

TETT: What about investors? I mean, what does this mean for investors when they look at inflation numbers and see what’s happening in terms of the markets right now? Should they be trying to take a more nuanced approach towards inflation, or looking at the current crowd psychology as well?

STATMAN: Well, inflation is of course very scary in terms of the investment scene; that is, I don’t know your portfolio, but I know mine, and I imagine that yours is not that different. And if you had an appreciation in your portfolio in the last few months, you should speak with me afterwards and tell me how you did it because mine has gone down, probably in the same way that yours has gone down.

And so what do I do? I do nothing, you know; that is, I know that if I am too scared, I will sell my stocks, for example. In all likelihood, I will later on regret it because I will still not know when to get back in. And so one of the—one of the elements, again, from cognitive psychology and behavioral finance has to do with representativeness. And so we look at the recent bout of inflation and the decline in the stock market as being representative of all periods. But of course it is not, and so one way that you can counter it is instead of looking at what happened to stocks in the last few months, if you look at it in spans of three years, or five years, or ten years, and then it is less frightening.

But, you know, so if you look at it over the long run—long run meaning five, ten, or twenty years—both stocks and bonds provided pretty good hedges against inflation—hedges in the sense that overall you had a good amount of real return beyond what is taken away by inflation. And so people will now invent or just point out how about commodities, how about tips, and so on. Perhaps, but they—once you get into insurance—as you know, insurance costs more than its actuarial value. So we insure our houses, we insure our cars, but we don’t insure our toasters, I hope, and the washing machine because we know that that doesn’t make sense. You just have to wait and, in time, that washing machine is going to go bad and you are going to replace it.

I think that having this presence of mind to say that you—that, too, shall pass is a very good piece of advice today.

TETT: Right. Well, your next book is actually about wellness in every sense, and that sounds like part of the message about trying to accept what you can’t control.

But one of the other emotions that investors often suffer from that you’ve also written a lot about is the regret problem—regret phenomena. Have you ever had any regrets?

STATMAN: (Laughs.) Yes, yes, yes. Yeah, we have all—we all have regret. Regret really is the—is the most frequent emotion people feel, and it is really very useful. Now regret is a twin with hindsight; that is, we tend to—hindsight is 20/20, as we say. We tend to believe that we have known all along what actually happened, and that gives us confidence to think that we know what the future is going to bring.

Now in some cases, there is a one-to-one relationship between action and outcome, and that is a place where regret does not—does not matter as much, or rather—you know, if you—if you turn your wheel to the right, and the car turns to the right, you know, that is exactly as expected. You are going to be entirely shocked if it turns—if your car turns to the left.

But in stocks and in most of life, there is an element of chance, of luck that goes between action and outcome so you can—you can be wise in terms of investing, say, for the long run and so on, but then comes what we have had in the last several months, and we feel that we are idiots because surely it was clear in January what is going to happen. Well, it was not—it was not clear to me, and so that emotion of regret comes next. And regret—generally emotions are—God or evolution planted them in us for good reason. It is not to spite us; it is to help us to combine with our cognition. And so when we hurt a friend and he is no longer a friend, well, we’ve learned something. We regret it, and we move on.

The same applies here. Do I feel regret? Sure. But I must say that I am able now to employ the System 2 and kind of chuckle at myself, and say, hey Meir, you’re not a genius. You didn’t see it all along. Stuff happens; get over it.

TETT: (Laughs.) Well, that’s sounds again like very good life wisdom.

One other quick question before we turn to the audience—and do start getting your questions ready now, both in the room and online. We’d love to hear from both of you.

But one of the other questions I have is in terms of, you know, the regret point, you know, do you think that Jay Powell and Co. should feel regret now? And what should they do with that emotion? How should they be behaving tomorrow? How should they—you know, how much—how high do you think rates are going to have to go? How high is inflation going to go do you think?

STATMAN: Well, I know that Powell knows that his foresight was not as good as his hindsight because he said that; that is, he said that the Fed made reasonable choices; that is, they thought that what is going to happen is what happened after 2008/2009; that we are going to have high unemployment, low demand for goods and services, and so on. Well, it didn’t turn out to be that way. He did not mention regret specifically, but I can imagine that he feels that. And of course regret is magnified by the reaction of the public; that is, he surely is not getting many looks of admiration now for taking action that now come and people say that it’s kind of late.

TETT: So do you think that inflation is going to go a lot higher?

STATMAN: (Laughs.) Well, I’m a behavioral economist so I don’t make predictions about the future.

I think that inflation might go up, but I don’t think that it’s going to go up by much. And let me just say this: there seems to be something kind of odd if you put side by side the fact that inflation occurs, to a large extent, because people have a ton of money, and they are spending, and they are not deterred by higher prices. So this means that their well-being is actually increasing.

On the other side, of course, there is inflation that is caused by that same spending, so in economic terms, people are doing quite well, other than the poor. And the poor, their problem is poverty. Their problem is not inflation.

And so what will happen is the demand is likely to go down. The problems with supply chains are going to be ironed out, and if need be there is going to be something like a Volcker where there’s going to be a hard stop with sad outcomes such as a deep recession. But people cannot live with inflation. Inflation is such a pain. The politicians know that, and politicians are going to stop it however painful it is.

TETT: So if we’re all given emotion for a period—for a purpose, I mean—the fact that the White House is panicking is quite useful right now.

STATMAN: It makes a—yeah, I would not want to be—well, I wouldn’t want to be in Biden’s shoes any day, but surely not now. It is—it is very hard, and as we said before, trying to explain it to the general public—as they say in politics, if you have to explain it, you have lost already.

And so, you know, if you’ll have to live with it, I hope that people will come to their senses. I hope that inflation declines in time for the election, and if not, well, you know, this is still a democracy, they say.

TETT: Absolutely. Right, we have a lot of questions already. You’ve certainly touched a lot of raw nerves here.

But, OK, let’s start with you because you put your hand up first, and then go back to the lady in green, and then the man over there, and then Nili.

Q: Michelle Caruso-Cabrera. I’m a longtime journalist.

Using your excellent hindsight—(laughs)—Jay Powell said recently that he thought financial conditions had tightened simply because they were warning that they were going to be raising interest rates, and so the market started to do their work on their behalf. Is that an example of behavioral economics? And using your hindsight, should they have done more of it? What could they have done—now, in hindsight—that would have prevented the sharp rise that we’ve seen?

STATMAN: Well, in hindsight, and Powell will tell you—you know, I’m just—I’m just citing him—he says: We should have tightened much earlier. But they didn’t. And what he says, or what I hear, is to err is human. You know, I did—we did the very best we could. But it is not the case that at the Fed they do not—they are the most stupid, ignorant people to create, implement policies. These are very smart, knowledgeable people. And yet, they have not seen it in time. And I think that they deserve a break, you know? (Laughs.) We all deserve a break.

TETT: I’d say, I’d ask one question to follow up there myself, because, you know, when people say to me you should have acted earlier, you know, my reaction tends to be, well, duh. Because, you know, one of the issues about the Fed staff is that they are extremely bright and brilliant. They have amazing models. They don’t actually get out that much—(laughter)—in terms of getting out to—you know, anyone who went to a warehouse or anyone who went to the ground six, twelve months ago would have seen the supply chain problems which were driving this. Do you think that’s a problem about the type of people or economists who are essentially driving Fed policy?

STATMAN: No, I don’t think that Powell never goes to a supermarket and has never seen a scanner. I think that they know human nature. I think that they know more than the statistics of unemployment and so on. I think that we take those red flags and we assemble them. And of course, some of those fed flags are actually not red. And we try to make sense of them based on what we have. And so I judge their decision as being reasonable at the time, at least understandable at the time. And I think that they’re changing course fast as new flags are coming in. But I’m less—I’m less down on Powell than you are.

TETT: Well, yeah. I’m a journalist. I’m paid to be cynical.

We’ve got a question right in the back, the lady in green. And then we’ll take a few questions online. And then we’ll come back to these two questions in the room.

Q: Hi. Vanessa Neumann. Hey, Gillian.

This is perhaps drawing more on your Israeli inflationary experience or, you know, experience, not just study. I wanted to hear your comment, both economically and behaviorally, on the impact when you have a government—a country that’s hyperinflationary and it bifurcates. And you have, you know, the reality of the hyperinflation and then hard currency, like the U.S. dollar. Case in point, I’m from Venezuela, is I can get a haircut for two dollars, but two dollars is actually a lot of money in Venezuela. So what happens? What happens to the country, to the people, to economic growth? Any of those? Thank you.

STATMAN: And so very high—in fact, 2 percent inflation is just high. It is really like soothing cream, where you can pretend that you got a raise even though you did not. But when inflation gets to be high, as in Israel at the time and Venezuela, people just abandon their calculations in the local currency, and they latch onto some currency—many times the dollar—that they think of as being relatively fixed in value. But what happens is that people cannot just switch to do everything in dollars. They don’t earn their money in dollars. And so it is really very hard, both economically and psychologically. I mention what Israelis did at the time, you know, in ways that were really very, very wasteful, adding anxiety and fear. And so it is not for nothing that politicians are sensitive to this issue of inflation. I think that they are sensitive to it because people are sensitive to it. And eventually, if you have a democracy, the government is going to be changed. And if you have a dictatorship, well—(laughs)—that is a different story.

TETT: Right. Well, we got some questions online—quite a few questions online actually. So.

OPERATOR: We will take our first question from Tara Hariharan.

Q: Thank you so much. My name is Tara Hariharan. I work for NWI, a hedge fund based in New York.

I’m very interested to hear whether behaviorally there is any effect on how the—both the consumer and the investor views inflation if they have not been used to inflation before. For instance, one of the things that we are observing in the financial markets is that many of the market participants were even sometimes born after the 1970s, and therefore are not used to inflation being as high as it is, given that we’ve had a low interest rate and low inflation environment for some time now. Is that one of the reasons why maybe there is an overreaction to U.S. inflation being at current rates?

TETT: Should we be hiring lots of people who are in their sixties?

STATMAN: Yeah, I think that we—one of the few advantages of old people is that they have gone through inflation and other experiences before and they can draw on them and perhaps calm their nerves somewhat. I think that people, like many experiences in life, even like puberty, people just have to go through it to fully comprehend it. And I think that perhaps they should speak with their parents or grandparents and hear stories about how inflation occurred, how people coped, what worked and what did not work. I surely would not sentence anyone to go to Venezuela or Zimbabwe, you know, where they—I think that they switched entirely to doing their things in U.S. dollars. It is really very scary.

And so it is more scary to people who are younger and have not experienced it and, of course, people who live on the edge. That is, I have to pay now $80 for a tank of gas instead of $50. Well, you know, I resent it, but it really does not affect my lifestyle. I imagine that it does not affect yours. But there are people whose problem is really poverty rather than inflation. And inflation is just one more thing that makes life miserable.

TETT: We have a question—another question online, then we’re going to go into the room.

OPERATOR: Our next question will be from Seema Mody.

Q: Good afternoon. Seema Mody, here. Global markets reporter at CNBC Business News.

When we look at the global implications of a faster than expected interest rate hike, do we enter a period of currency wars? We’ve already seen countries like Japan come under great pressure. Is this just the start? And your thoughts on how this could play out.

STATMAN: Well, of course, it affects interest rates in the United States. And if it affects them in the United States, it spills over to Japan, and Germany, and other places. Now, it seems, just judging from day-to-day changes in the prices of bonds, that people are continuously surprised by how high inflation is, because it is not like it went down and then leveled off. It seems to be going down every day. I don’t really have much insight into how it is going to spillover to other economies, like Japan. But I imagine that they suffer the same—the same malady, and their people are nervous in the same way, because what happens surely in a place like the United States spills over and affects people in many other countries.

TETT: Right. We have a question from the back there, and then front, and then we’ll go to two more, and then we’ll come to you, sir.

Q: Fred Hochberg. Hello, Gillian.

TETT: Oh, hi. Sorry, I haven’t got my glasses on. I lost them. (Laughter.) If I’m peering at your all, that’s why. Apologies.

Q: A question. And I’m going back to even when we went to business school, which was in the last century. I always thought of Americans being more recession averse after having lived through the Depression. Europe, and particularly Germany, being more inflation averse based on their history. But maybe that’s flipped. I wonder whether—or, whether just people are generally unhappy. So whether it’s inflation or recession, it becomes a reason for a disgruntled populace, or?

STATMAN: Yes. Yes. I think that people are disgruntled for both reasons. Yeah, it is true that Germans are—still remember—I suppose not a living memory—the hyperinflation that they had in the late ’20s, early ’30s. And of course, we care about recessions, and they scare us. But it seems like people flip. I don’t want to call Americans ungrateful. I’m an American myself. But it seems like American voters expect perfection. And they expect the government always to listen to them. Even though, of course—(laughs)—there’s more than one opinion. So what can I do? Every day I wake up and I say, God, thank you for not making me a politician. I get to write my papers in hindsight without having to worry about whether 50 percent plus one like me or not.

TETT: I must say, having, I think, the folk memory of hyperinflation in Germany weighed heavily on the Bundesbank. And having worked in Japan for years myself, I can say that certainly the folk memories of the turmoil of the 1930s weigh heavily on the policymakers. I remember walking around the Bank of Japan late at night and seeing portraits of all the former governors, and they pointed out to me that two of them had been assassinated.


TETT: —because there had been a fury over hyperinflation and things. And once you’ve had that baked into you as a folk memory at the central bank, you kind of don’t forget it.

STATMAN: Yes. Yes. And Germans to this very day are very reluctant to buy stocks. So even though they have not experienced it themselves, it is really part of the national history and national culture, like some other things in Germany.

TETT: Yeah. We have a question here in the front, then we’ll go to two more online. I think Nili—actually, Nili over here, and then two more online, and then we’ll come to you.

Q: Thank you so much for this rich and timely discussion. I’m Nili Gilbert, the vice chairwoman of Carbon Direct.

When we think about inflation becoming untethered, it’s often off the back of inflation expectations beyond the forces of things like supply chain crises and issues in the real economy. And so I wonder how you think that policymakers could communicate today to try to avoid the forces of inflation expectations pushing this problem further out. It’s more than just monetary policy strategy. It’s communication strategy and managing behavioral expectations and actions. Thank you.

STATMAN: Thank you. Yeah, indeed, there is a tendency, because of representativeness, the tendency to extrapolate. And so we tend to extrapolate from recent events, and most importantly, from vivid events. And God knows that inflation is vivid. So when you have a view, then there is what you talk about when you talk about confirmation. Confirmation, shortcuts, and errors. When we think as normal good-thinking people, system one, we—when we have a hypothesis, say that, whatever, that Trump is going to run again, we look for information that confirms our beliefs rather than information that contradicts it. And so when people have the sense that inflation is here to stay, then look at the price that has gone up and say, see, I told you so. That’s confirming evidence.

Now, the problem is that people do not naturally switch to becoming scientists who say, wait a minute, let’s also look at this confirming evidence. And what makes it worse is that we are guilty of is something that we know is motivated reasoning. That is when somebody has an interest in just pointing out one part of it, that is if you are the defense, if you are the plaintiff, each of them is looking for evidence confirming their beliefs. Judges are supposed to be the ones who are going to weigh confirming evidence and disconfirming evidence. Now, you know, think of what politicians are doing.

That is a, if I might say so, Republicans are just, yeah, they are upset about inflation, but they are really happy that that might well be the downfall of Biden. And so Kevin McCarthy said that instead of having hearings about January 6th, they should have hearings about inflation, you know? So it is not just the nature of people who don’t know, and you are going to sit them down, and you are going to explain things. There are people who have in their interest to distort things and to hide particular pieces of information. And, you know, I’m neutral here on politics. I don’t want the implications here. Yeah, that is, don’t go after me and check my voting behavior.

TETT: (Laughs.) Right. We have a question online.

OPERATOR: Our next question is from Mahesh Kotecha.

Q: Thank you very much. Thank you very much. Gillian, nice to see you. Professor Statman, brilliant discussion.

I’d like to ask you to reflect on the more than two-year pandemic and ask this question: How does the pandemic experience change the way we will perceive inflation and the way we will perceive, if you will, politics related to inflation? Has that changed us? Or do you think that our behavior remains essentially human behavior? Does the pandemic change the—telescope our—does it alter our vision?

STATMAN: Well, human behavior is generally constant. Generally, not changing very easily. Even when we had a pandemic, of course, we lived through it. We are anxious. We tried to cope. And we don’t just forget it. But I don’t think that it changes it by a whole lot. What is happening is that when you have—so, they say that the Fed was fighting the last war when unemployment and recession were the thing, and you have to stimulate spending. What might well happen now is that when the next crisis comes, the Fed is going to take the playbook of what happened now and they’re going to, say, begin raising interest too soon, rather than too late, when the economy is going to go into a recession.

And when I think about it, and perhaps when you think about it, 8 percent inflation is very unpleasant. But in real terms, in terms of misery, high unemployment is much a greater pain. And so if people who are politicians—in other words, if people did not have to appeal to people’s intuition, they would say, we can live with a bit of inflation. We can wait for the supply chain to straighten itself out and for the money that people saved to be spent, and so on, and leave it alone. But you just cannot do that in a—in a country that is not ruled by dictator. You really have to ask yourself how will people vote in the next election? And it has to do with how they feel now.

TETT: Right. I think, sadly, the message of “just take a chill pill” doesn’t really work. (Laughter.)


TETT: We have a question there.

Q: Thank you. Niso Abuaf, Pace University.

You kind of alluded the answer to my question, but you haven’t addressed head on. What are the political and psychological costs of inflation versus an engineered recession?

STATMAN: Well, you know, the political costs of inflation are obvious now. That is, when objectively speaking inflation is not the number-one problem of the United States, the possible disruption of democracy might well be more important than that. But it is on people’s mind psychologically. And it’s very hard to take away. And so explaining to people that the alternative would have been not giving people—say, poor people their stimulus money, having them evicted from their houses, apartments, and so on, you know, that is kind of like a chill pill.

That is, you can explain that—I’m an economist. But if I were speaking like this stereotypical economist who are let me give you the facts, I know enough about real life and behavior. I see things and I know that Biden is in a pickle. You know, and that we might well find ourselves in a—in a recession that is caused by clamping down too hard and too soon on inflation and getting a disease better than the one we have.

TETT: Do you know of any—oh, sorry, got a question back there. And I think this will, sadly, have to be the last question.

Q: Ash Williams, JPMorgan.

My question would be this, Professor. Clearly this on the psychology, the perception consumers have about inflation. We talked a little bit about the steps policymakers can take other than monetary policy to change a phenomenon, inflation, that traces its roots to many things, including armed conflict, fiscal policy, monetary policy, et cetera. So accepting that there can be distortions for political reasons on one side or the other, or both, what are the things that could be done that would be the equivalent on the defeating perceptions of inflation side that gas prices are on the inflaming perceptions of inflation side?

TETT: So if you had a magic wand and you were Powell or Biden, what would you do?

STATMAN: Well, you know—

TETT: In about one minute.

STATMAN: One thing that can be done is what we had with Social Security. It is not perfect, but it is explicitly linked to inflation. And so with delay, people get compensated for those price increases. So in Israel, for example, as I mentioned, salaries were routinely adjusted for—linked explicitly—to inflation. So if we—if we got into this habit of having contracts that are explicitly linked to inflation—it will not solve everything because of delays and so on—but it will calm down some of those—some of those fears. That is a reasonable thing. Explaining to people that gas prices are high because Ukraine is being hammered, that’s more difficult.

TETT: Right. Well, thank you very much, indeed, for that very thought-provoking presentation and discussion which, as I said, is very, very timely and, frankly, very badly needed, given the kind of shock that’s being felt across the economy, and the political repercussions. I think it’s particularly timely that, as I said earlier, the fact that we’re doing this part of a seminar funded in the legacy of Bob Menschel, given his role in weaving together his own experience of finance and behavior on markets, with some of the theory. So thank you.

And thank you to the audience for—oh, sorry—thank you to the members. I always get that bit wrong. Thank you to the members of CFR for all your great questions, both those and online. Apologies to those of you I didn’t recognize because I haven’t got my glasses. But in the meantime, it remains for me to say very best of luck to all of you in figuring out what this means in your everyday lives and in your portfolios.

And I’ll just also say, two other housekeeping points. Firstly, the video of today’s meeting will be posted on the CFR website. And for those of you joining in person in New York, there’s now a brief coffee break. And the second session of this symposium, addressing inflation expectations, begins at 2:15 both here and in New York—and on Zoom. So thank you all very much, indeed. (Applause.)

STATMAN: Thank you.


Virtual Keynote Session: A Conversation With Meir Statman
Meir Statman discusses how cognitive bias can exacerbate consumer concerns in an inflationary environment.
Richard Haass
In-Person Session II: Addressing Inflation Expectations

Panelists will discuss whether public perceptions of inflation have been compounded from the pandemic compared to other inflationary periods, if central bank mechanisms adequately captured consumer perceptions, and how governments and policymakers communicate to moderate inflation expectations.

Virtual Session II: Addressing Inflation Expectations

Panelists will discuss whether public perceptions of inflation have been compounded from the pandemic compared to other inflationary periods, if central bank mechanisms adequately captured consumer perceptions, and how governments and policymakers communicate to moderate inflation expectations.

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