Adam Drake

The Dismal Jobs Report, Economic Recovery, and Normalcy Bias

Well everyone is reacting with shock and amazement at the negative June jobs report, which showed that contrary to the 125,000 jobs that even the most pessimistic economists expected to be added to the economy, the actual number was in fact about 18,000. This isn’t surprising, as this recovery will take a long time. In fact, it will take longer than most people expect and that is due in part to something called Normalcy Bias.

Normalcy bias is a cognitive bias which is of particular interest, given the global financial crash that occurred in 2008 and the ensuing recovery. The normalcy bias is a mental state that is entered into when faced with a disaster and leads to underestimation of the possibility that a disaster will occur, in addition to underestimating the possible effects of the disaster itself.

The result of the normalcy bias is inadequate preparation for disasters because there is a propensity to believe that such a disaster has never occurred and therefore such a disaster will never occur. In addition, it makes coping with the disaster exceedingly difficult once it starts.

Lastly, and perhaps most importantly, the normalcy bias causes people to interpret warnings as optimistically as possible by using ambiguities to conclude that the situation is not as serious as it seems.

Consider the statement from Bruce McCain, chief investment strategist at Key Private Bank, who said

It was obviously a shock, although in retrospect, I don’t think we should be inordinately surprised by the report considering the weakness in the second quarter.

This is a textbook example of optimistic interpretation of information due to normalcy bias.

Another good example of the normalcy bias was seen during Hurricane Katrina. Even after mandatory evacuation orders were given, and the situation in New Orleans had become dire, there were thousands of people who refused to evacuate the city. Many people in New Orleans lost their lives because of their inability to overcome the normalcy bias. They were simply convinced that everything would be fine.

Overcoming the normalcy bias can be difficult, since there is a fine line between identifying and planning for potential issues and having a constant doomsday attitude. In addition, many financial disasters are difficult to predict and therefore accepting and adapting to conditions is more important than identifying potential problems and planning for them. In the case of the economic recovery and the jobs report, normalcy bias causes people to underestimate the severity of the issue, and overestimate the speed with which a recovery will take place.

When the normalcy bias is too prevalent, we get situations like the one that unfolded today wherein people who think a recovery is in full swing are hit square in the face with the stark realities of the situation.

The recovery will take time. A long time. Don’t succumb to the normalcy bias and conclude that things will return to normal with surprising expediency. Do all you can to benefit from the recovery as it occurs. In the meantime make sure you are investing in yourself, specifically your transferable skills, so that when the economy is in full swing again you will be marketable to many employers.