The most dangerous fake news of our time are the stories that fall into the too-good-to-be-true category. Like the one that the EU and Japan have reached a trade deal.
The problem with the EU-Japan “trade agreement” is simply that it is not yet a trade agreement. The difficult bits still have to be agreed, including the vexed question over investor tribunals. The latter was the reason why the EU-Canada economic and trade pact almost faltered last year.
Parliaments in EU member states have since become even more hostile to such private-sector courts that override national legal systems.
So why did the EU and Japan announce a deal that is not ready? Look at the timing. It was intended as a public relations coup on the eve of the Group of 20 meeting. The EU wanted to signal its commitment to free trade and to isolate President Donald Trump of the US.
The uncritical reception of the EU-Japan trade story is a good example of what psychologists refer to as confirmation bias, a tendency to filter out everything that is not consistent with our beliefs. We believe in free trade, hence, we want an EU-Japan deal to be true. And then we take the fateful step of believing it is, as opposed to calling it what it really is: a shameful attempt at manipulation.
Confirmation bias is everywhere. It is rare that media commentators cross the line between what they want to be true and what they forecast is going to happen. In Brexit debates, those advocating Britain’s exit from the EU underestimated the many technical problems. Remain supporters first misjudged the political dynamics and then overplayed the possibility of a Brexit reversal. Now they are making a big deal of the eurozone’s stronger economic growth during the first quarter.
Their behaviour is no better than that of the Brexiters. The story conveniently ignores what happened in the previous eight years. The eurozone fell into a much deeper hole than the UK after the global financial crisis and is now bouncing back a little more. Official unemployment rates are falling. But as Peter Praet, chief economist of the European Central Bank, reminded us last week: the assessment of the eurozone economy is different if you take a wider metric of unemployment that includes the quality of employment and the large number of discouraged workers. Under this measure, unemployment in the eurozone is a whopping 18 per cent. This is not a story that sits easily with the narrative of a successful eurozone and a pending failure of the UK.
Another example of confirmation bias is the debate about the future of the euro. It is no coincidence that Eurosceptics would relish nothing more than the demise of the euro. They kept on underestimating the political cohesion of the eurozone.
But euro enthusiasts are not any better. Their innate complacency about the serial failures of the banking union and the rise in macroeconomic imbalances is the biggest threat to the sustainability of the single currency.
Daniel Kahneman, the psychologist, has identified two further sources of bias in his book Thinking, Fast and Slow. One is hindsight bias. Mr Kahneman cites as an example the now popular notion that global financial crisis was bound to happen. The truth is that only a minority of bankers, analysts, journalists and politicians saw it coming. Remember the nonsense about the great moderation?
The second one he mentions is outcome bias — where we judge a decision to be right or wrong by whether it was successful or not. We applauded the hedge fund managers who bet against the subprime market in the US when their assumption turned out to be correct. But what if the subprime crisis had blown up only one year later? The bet might not have worked, and our judgment would have been the opposite.
Getting rid of these biases is hard. We like to see our prejudices confirmed, our forecasts come true and our professional honour respected. Confirmation bias is like a drug. It feels great while you are confirming your beliefs, but not so much when you wake up in the morning to find that your country has left the EU.
What to do about it? Fact checking is not the answer. We are not lacking facts, or access to facts. The problem with confirmation bias is that we filter out the inconvenient ones. Trying to argue the opposite case of what you believe can be a good discipline. In the EU-Japan trade story, it would have been enough simply to make the counterfactual case: would the EU and Japan have chosen the eve of a G20 summit to declare that they utterly failed to reach the agreement? If you believe that, you believe anything.
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