ELI5: 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?

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The prediction is a sort of self fulfilling prophecy. However a prediction of a recession will not do much unless all the analysts in the market also make the same prediction. In addition people will be looking for some sort of trigger in addition to having predicted the recession. So if there is some sort of trigger and nobody predicts a recession then there will not be one yet. However if at some later point you get the same trigger but the majority of the market does predict that the recession is close it will trigger it and cause a recession.


There is a theory that when it comes to large scale human behavior as soon as you start to measure something, the measurement loses some of its value. You want to measure how well your business is doing? Measure quarterly profit and instantly the company will start to do weird shit to boost quarterly figures in the short term. However just because measurements corrupt things doesn’t mean that they are useless. Everyone has been eyeing the market thinking that it is behaving oddly. Valuations on assets are sky high, unemployment is low, yet inflation is low and wages are not rising. People have been watching these bond yield numbers for a year now seeing them flashing danger signs and this is just the straw that broke the camel’s back in terms of convincing people there is a real challenge here. The fundamentals of the market are fucked up right now.


The man who sold very good hot dogs There was once a man who lived by the side of the road and sold hot dogs. He was hard of hearing so he had no radio – he had trouble with his eyes, so he read no newspapers and of course he didn’t look at television. But he sold very good hot dogs. He put up signs on the highway telling everyone how good they were, he stood on the side of the road and cried out to all that past ‘buy a hot dog, they are the best in town’. And people bought his hot dogs and he increased his meat and bun orders. He bought a bigger stove to take care of all the extra business. He finally got his son to come and help him out with his business. But then something happened, his son who had been well educated said . . . ‘ Father, haven’t you been listening to the radio or reading the newspapers or watching television? There’s a big recession happening right now. The current business situation is terrible in this country – we have problems with unemployment, high living costs, strikes, pollution, the influence of minorities and majorities, the rich, the poor, drugs, alcohol, capitalism and communism ‘. Where upon his father thought, ‘ well my son’s been well educated, he reads the papers, listens to the radio and watches television, so he ought to know ‘. So his father cut down on his meat and bun orders, took down all his advertising signs and no longer bothered to stand by the side of the road to promote and sell his hot dogs, . . . . and his hot dog sales fell almost overnight.


If it were that shallow, yes. But there is a ton of real data, visible to all investors, that goes into that prediction. So in reality it is the actual data about economic performance that leads to the recession.


The way you phrased the question, “if prediction *causes* a market recession, is the prediction part of the cause?” Yes. Yes it is. By definition. Instead, “do predictions cause market crashes?” No, probably not. People make predictions every day. It probably balances-out on average.