Director MBMG Investment Advisory
Is the Fed a Cult? - Part 3
In my previous article I wrote about why the Federal
Reserve is beginning to look like a cult, with its dogmatic beliefs in a
system which, to the outsider, clearly does not work.
With that in mind, I decided to do a quick review of how the Fed installs
such beliefs. Wikipedia lists cognitive and social biases which affect
belief formation, business and economic decisions, and human behaviour in
general1. Below are part 2 of the ones which I believe facilitate the ‘Cult
of The Fed’:
The tendency to seek information even when it cannot affect action-
sounds like how central banks send their lives!
Insensitivity to sample size
The tendency to under-expect variation in small samples- the focus on
very short term data points by the fed and lack of context
The phenomenon where people justify increased investment in a decision,
based on the cumulative prior investment, despite new evidence suggesting
that the decision was probably wrong-The Cult of the Fed- if what we’re
doing isn’t working, it can only be because we’re not doing enough of it
The tendency for people to want to believe that the world is
fundamentally just, causing them to rationalize an otherwise inexplicable
injustice as deserved by the victim(s)- this may explain the acceptance of
policy by the wider cult members.
“the disutility of giving up an object is greater than the utility
associated with acquiring it”.(see also Sunk cost effects and endowment
effect)- the cost to the socio-economy of preserving the bank system exceeds
the cost of letting it go
The misuse of games to model real-life situations- the Fed is all about
mark to fantasy models
Mere exposure effect
The tendency to express undue liking for things merely because of
familiarity with them-Fed loves interest rates, fed loves money supply.
The tendency to concentrate on the nominal (face value) of money rather
than its value in terms of purchasing power- Do I need to say anything??
Neglect of probability
The tendency to completely disregard probability when making a decision
under uncertainty-Fed have pursued utterly implausible experiments because
they neglected the probable outcomes.
The refusal to plan for, or react to, a disaster which has never
happened before- well it has but a long time ago and they won’t face it
Observation selection bias
The effect of suddenly noticing things that were not noticed previously
– and as a result wrongly assuming that the frequency has increased- the GFC
built up over 30 years but fed behaved like it had appeared overnight but
then started treating it that way!
When a researcher expects a given result and therefore unconsciously
manipulates an experiment or misinterprets data in order to find it (see
also subject-expectancy effect)-The Fed only really know one policy option
so they reverse engineer all outcomes o fit it.
The tendency to judge harmful actions as worse, or less moral, than
equally harmful omissions (inactions)-You betcha – if the Fed had done
nothing in 08 the crisis would have been over by 2010.
The tendency to be over-optimistic, overestimating favourable and
pleasing outcomes (see also wishful thinking, valence effect, positive
outcome bias)- got it in one!
Ignoring an obvious (negative) situation- and again!
Excessive confidence in one’s own answers to questions. For example, for
certain types of questions, answers that people rate as “99% certain” turn
out to be wrong 40% of the time- Fed track record at predictions has been
shown to be appalling and yet they still act as though they have absolute
certainty about the future
The tendency to persuade oneself through rational argument that a
purchase was a good value-the Fed Cult have been doing this together ever
The tendency to have an excessive optimism towards an invention or
innovation’s usefulness throughout society, while often failing to identify
its limitations and weaknesses- that’s the fed and QE/ZIRP!
Pseudo certainty effect The tendency to make risk-averse choices if the
expected outcome is positive, but make risk-seeking choices to avoid
negative outcomes-sounds like the fed.
The tendency to reject new evidence that contradicts a paradigm-BoE
refusing to acknowledge its own findings.
Status quo bias
The tendency to like things to stay relatively the same (see also loss
aversion, endowment effect, and system justification)- central bankers’
Perception that something is true if a subject’s belief demands it to be
true. Also assigns perceived connections between coincidences-Hello the Cult
of The Fed
An effect in which incompetent people fail to realise they are
incompetent because they lack the skill to distinguish between competence
and incompetence. Actual competence may weaken self-confidence, as competent
individuals may falsely assume that others have an equivalent
understanding-The Fed can’t because they think they can.
False consensus effect
The tendency for people to overestimate the degree to which others agree
with them-The Fed doesn’t promote healthy debate on this it encourages
within very narrow bounds and disregards even its own findings that stray
Overestimating one’s desirable qualities, and underestimating
undesirable qualities, relative to other people. (Also known as “Lake
Wobegon effect,” “better-than-average effect,” or “superiority bias”)-The
Cult of The Fed.
The tendency for people to give preferential treatment to others they
perceive to be members of their own groups- More Cult of the Fed
Expecting more egocentric bias in others than in oneself-The Fed sees
itself as rational…oh boy….
Outgroup homogeneity bias
Individuals see members of their own group as being relatively more
varied than members of other groups- they don’t even realize that they’re a
The tendency to unconsciously assume that others (or one’s future
selves) share one’s current emotional states, thoughts and values- they
think they’re normal!
Shared information bias
Known as the tendency for group members to spend more time and energy
discussing information that all members are already familiar with (i.e.,
shared information), and less time and energy discussing information that
only some members are aware of (i.e., unshared information) - sounds like
The tendency to defend and bolster the status quo. Existing social,
economic, and political arrangements tend to be preferred, and alternatives
disparaged sometimes even at the expense of individual and collective
self-interest. (See also status quo bias.)- The Fed!!!!
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