If a prediction of a recession causes the market to crash, can it be said that the prediction itself is part of the cause of the recession? Like a self-fulfilling prophecy?

Question

If a prediction of a recession causes the market to crash, can it be said that the prediction itself is part of the cause of the recession? Like a self-fulfilling prophecy?

In: Economics

Answer 1

Say you have a magic crystal to accurately see into the future, and say you do see a recession.

You could always claim that your prophecy itself caused the recession as most people believe in the truthfullness of your magic crystal. But it could equally also be the recession occurred independently of your prophecy.

There is no way to know which scenario happened, unless you do experiments and won’t prophesize when you do see the recession. But all this does is tinting your own crystal, making it less reliable, and losing in competition against other guys with other crystals. You cannot do that experiment unless you effectively burn your crystal.

The answer to that paradox is simple: not the crystal or the prophecy causes the recession, but the nervous state of the economy causes the recession, when small changes in opinion have a large impact.