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’:
Information bias
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
Irrational escalation
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
Just-world hypothesis
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.
Loss aversion
“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
Ludic fallacy
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.
Money illusion
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.
Normalcy bias
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!
Observer-expectancy effect
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.
Omission bias
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.
Optimism bias
The tendency to be over-optimistic, overestimating favourable and pleasing outcomes (see also wishful thinking, valence effect, positive outcome bias)- got it in one!
Ostrich effect
Ignoring an obvious (negative) situation- and again!
Overconfidence effect
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
Post-purchase rationalization
The tendency to persuade oneself through rational argument that a purchase was a good value-the Fed Cult have been doing this together ever since QE1!!
Pro-innovation bias
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.
Semmelweis reflex
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’ central tendency!
Subjective validation
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
Dunning–Kruger effect
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 beyond this.
Illusory superiority
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.
Ingroup bias
The tendency for people to give preferential treatment to others they perceive to be members of their own groups- More Cult of the Fed
Naive cynicism
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 weird cult!
Projection bias
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 FOMC minutes!
System justification
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!!!!
Footnote:
1 http://en.wikipedia.org/wiki/List_of_cognitive_biases

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