Value at Looking Back: Towards an Empirical Validation of the Role of Reflexivity in Econo-Historic Backtesting: Economic Market Prediction Corrections Correlate with Future Market Performance

Abstract

Globalization led to an intricate set of interactive relationships between individuals, organizations and states. Unprecedented global interaction possibilities have made communication more complex than ever before in history as the whole has different properties than the sum of its increasing diversified parts. With growing globalization and quickening of transfer speed, information may impose unknown systemic economic risks on a global scale. Collective interaction effects lead to hard-to-foreseeable fallacy of composition downfalls. Emergent risks imbued in interaction appear to be inherent in global economic systems. In the light of growing tendencies of globalization, the demand for an in-depth understanding of how information echoes in socio-economic correlates has gained unprecedented momentum. In seeking to shed light on implicit system failures’ socio-economic consequences down the road and potentially-disastrous outcomes of cumulative actions triggering mass movements; the paper outlines unexpected dangers and insufficiently-described shadows of past market expectation corrections on future economic market performance. Overall, the following article innovatively paints a novel picture of the mass psychological underpinnings of business cycles based on information flows in order to recommend how certain communication strategies could counterweight and alleviate information failing market performance expectations that could potentially build disastrous financial market mass movements of booms and busts. This paper will study the role of information in building socially-constructed economic correlates, which promises to explain how market outcomes are developed in the social compound and can be guided by central agents’ communication. Classical theories of price will be reflected in regards to market expectations. Through the lens of the real competition paradigm, the following paper will then specifically unravel how central bank economic forecasts produce certain types of price expectations that form market patterns leading to collectively-shared economic outcomes that may echo in the real economy. An introduction to the history of economic cycles will lead to George Soros’ Theory of Reflexivity and Anwar Shaikh’s formalization in order to draw inferences for the analysis of the role of information in creating economic booms and busts in the age of globalization. Empirically, based on a central European central bank’s GNP projections and backtesting corrections, a pattern of central bank corrections communication and economic market performance will be unraveled for the first time to outline that central bank market prediction corrections are positively correlated with near future market performances and negatively correlated with distant future market performances. The collective reality of prices and the irrationality of the crowds perturbating markets will be discussed. Business cycles are argued to obey some kind of natural complexity, as for being influenced by econo-historic communication trends. Recommendations how to create more stable economic systems by avoiding emergent risks in communicating market prospects more cautiously will be given in the discussion followed by a prospective future research outlook and conclusion.