“Irrational beliefs can also impact individuals’ financial choices, investment decisions, and economic outcomes.” OR “Rationality is one of the fundamental pillars of Economics; we assume all economic players to be rational in their choices. By that logic, superstitions, inherently irrational, should have no impact on economic equilibrium analysis. But, is the story truly that simple?”
What do you do when asked to leave your ‘lucky’ spot in the middle of an extremely tense India-Pakistan cricket match? Only the last few balls are left, India needs just ten runs to win; Kohli is trying his best to hit that one life-saving six, and bam, your mother asks you to shift on the sofa! Will you? This author, for one, would not. After all, the risk is too high, isn’t it?
The chain of superstitions, defined as a series of objectively false beliefs, has a tendency of being attributed to the ‘so-called’ foolish, the ignorant, and the illiterates. “And yet, even smart, educated, emotionally stable adults believe superstitions that they recognize are not rational,” Jane Risen, a University of Chicago Booth School of Business psychologist who studies superstitions and magical thinking, has written. Shocking, isn’t it? What guides the psychology of superstition then? And does it have an impact on the market mechanisms, as they grow? Throughout the article, we explore the same.
The Psychology of Superstitions
Superstitions, essentially stem from impulsive intuitions, gut feelings, or pre-conceived notions that our human mind tends to lean towards, due to cultural, environmental, and familial biases. For example, if you have grown up observing your family avoiding black cats, it is extremely likely you would carry that ‘ritual’ forward.
Daniel Kahneman, in his book, Thinking, Fast and Slow’, has popularised something similar, namely the concept of ‘System 1 and System 2. According to him, decisions are based on System 1 short-cuts called heuristics which are quick to generate superstitious beliefs that serve as the default for judgment and behaviour. Although these may be wrong and prone to correction by System 2, that generally does not happen, because what if the moment you leave that spot, India ends up losing the match? “You would be tempting fate!” The subconscious proclaims.
There are other factors too, that fuel superstitions, confirmation bias is one; it happened that one time, probably a billion days ago, but how can I risk it? What if it happens again? Superstitions are also fuelled by those pesky, nagging voices that whisper in your ear, how in this world of chaos, your small or big acts of ‘rituality’ can be sources of guaranteed comfort. That, if by adding just a 1-rupee coin, you can bestow eternal togetherness upon the married couple, why not?
“But, they really work!” An average believer would say, in defence, unbeknownst that it isn’t the act, rather the hope, the energy, the positivity associated with it, that translates materially and makes ‘the magic’ happen. The magic which influences mind, and distorts economies. The economic magic of superstitions.
The Economics Of Superstition
Rationality is one of the fundamental pillars of Economics; we assume all economic players to be rational in their choices. By that logic, superstitions, inherently irrational, should have no impact on economic equilibrium analysis. But, is the story truly that simple?
Fudenberg and Levine, in “Superstition and Rational Learning (2006)” after constructing game-theoretic models and conducting empirical analyses, highlight how some superstitions persist even in rational conditions and affect the behaviour of people. They drive structures off the equilibrium path. When faced with an impromptu choice, consumers tend to prefer ‘safer, luckier, though expensive’ commodities, especially during recession or ‘risky times.’ Herein, the marginal utility shoots up due to biases rather than brand loyalty or price sensitivity. This can be illustrated by how during the pandemic, consumers purchased certain lucky charms, simply because it provided them a semblance of comfort.
‘The Auspicious story’
If I take an example, in India, the number 13 is considered largely inauspicious. Despite a comparatively lower price, consumers are less willing to invest, in say, real estate associated with that number. In contrast, the number 9 is highly valued.
Extending this hypothesis, we examine how in case of unlucky products, the buyers refuse to concede; they are largely unwilling to buy the product; a rise or fall in the price doesn’t affect their choices and preferences. Similarly, the sellers are desperate to get rid of the product; the lack of demand further fuels on to their fears and as their marginal cost of holding on to the product increases, they stop responding to price changes. Similarly, In the case of ‘Lucky products’ buyers ‘fight’ to get their hands on those ‘few lucky commodities’ say, specially designed Team India Jerseys, while the supply remains limited despite price fluctuations. As a result, demand and supply remain inelastic, leading to substantial price jumps, in case of shifts. Hence, both particular consumers and businesses possess the incentive to manipulate the mass psychology for their own gains. Additionally certain cultural and religious biases also affect this.
‘The Stock Effect’
Irrational beliefs can also impact individuals’ financial choices, investment decisions, and economic outcomes. Investor superstition, for example, can potentially amplify their sensitivity to bad news from firms that are perceived unlucky, thus leading to a rise in stock price crash risk for these unlucky firms. It can also lead to investors making irrational decisions that can cost them money. For example, an investor who believes that a certain number is lucky may be more likely to invest in a stock with that number in the ticker symbol, even if the stock is overpriced or has poor fundamentals. These deviations from rational equilibrium have profound implications.
There are other trends too:-
- The Superball Indicator
The weirdest of them all perhaps, it talks about how the team that wins the big Sunday game, determines the rise and fall in various stock portfolios. But, can that ever be indicator enough for an investor? Since a long time, the answer has been a supposed ‘yes’ with people blindly trusting these results, despite them just being correlated and not holding any causal relation whatsoever. As a result, stock markets do, in actuality fluctuate after the match, based on the perceptions, attitudes and moods of people.
- The Eclipse Effect
Throughout history, there have been instances where lunar eclipses have coincided with notable financial market events, like a sudden surge or significant downturn. And though, many investors treat this as God’s signal and become superstitious, this happens primarily because heightened fear and anxiety caused by a perceived sense of bad omen, affects the decisions of a large number of stock investors, and leading to fluctuations.
Impact on Businesses
Perceived notions of what people consider ill omens, also affect company revenues, as during these times, demand takes a hit, leading to losses. A particular example could be how Shraadh, affects consumer behaviors in India and businesses need to literally force people out, to buy stuff, by wooing them with discounts and offers.
But then, it could also work the other way around. If companies manage to convince the buyers about certain luck, auspiciousness and charmed beliefs related to their products via their marketing strategies, they can earn lucrative profits. Additionally, associating certain lucky number to the pricing of their goods can attract more customers.
But then, often businessmen themselves indulge in such beliefs, altering their supply pattern accordingly and leading to varied changes.
The Financial Loop
Superstitions also affect the financial planning and saving behaviours of individuals, as their perceived biases about financial institutions, credit, savings, etc, drastically alter the way in which they take their decisions. This creates a loop; you don’t invest money in banks, for it has been passed through generations that it would mean disrespect, and now you are suspicious and don’t plan your money well, in turn holding another belief accountable at the time of adversity. The problem starts at the top, but develops over the years, with nuanced arguments added to enhance the case of the ‘supposed faith’.
Similar to this, there are numerous arguments and examples that depict how superstitions affect the economic events, they alter them drastically and change the structure of their course. Understanding these interplays is crucial for policymakers, investors, and researchers seeking to enhance financial literacy and promote rational economic behaviour.
Conclusion
Superstitions are pervasive, persisting beliefs that affect the way we think, act and behave. And they aren’t always trivial or stupid, they infact make us human. They grow on us, and creep into our purchasing and selling behaviours, silently affecting the decisions and choices we make and charting the economy off the trajectory. Understanding the way they impact the market, our economies and daily expenses and life can further help foster a better mechanism for growth.
By:-Swasti Jain