How can we bridge the gap between economic fact and economic sentiment? A new report sheds light

In some countries, there is a persistent gap between data showing improving economic conditions and negative perceptions about the economy. By some measures, those negative perceptions have been increasing even when people report being satisfied with their personal financial wellbeing. Why? Does it matter? What can we do about it?

These are some of the questions explored in the latest 2023/24 Human Development Report, published last month by the United Nations Development Programme (UNDP). The report documents a widespread increase in recent years in self-reported measures of sadness, worry and stress (see below).

The report suggests that two channels contribute to these trends. Firstly, some people suffer objective economic hardship, even when the overall economic conditions improve. Secondly, some people are working through perceptions of being under threat or feeling left behind, even when objective indicators of wellbeing are unchanged or even improving.

This second channel results in shifts in beliefs and attitudes that matter because people’s behaviour, including political behaviour, is shaped in part by these beliefs. When they are associated with perceptions of insecurity, these beliefs are strongly linked to people having a lower sense of control over their lives and trusting others less (see below).

Negative perceptions about the economy can become entrenched when they signal belonging to a group that shares a broader package of beliefs. This may include things like hostility to action on climate change or vaccinations during the COVID-19 pandemic. Facts alone may not be sufficient to dislodge these negative beliefs and acting consistently with these beliefs may go against what would be expected to be in peoples’ own interest – as the rejection of vaccination during a pandemic would suggest.

Moreover, when different groups hold very different beliefs that become somehow part of people’s identities, society can become polarized.

This is not about differences in opinion on what is best for society or on policy preferences, which are healthy characteristics of any society, but differences that extend to a whole range of behaviours and choices, not only on who to support politically but also where to live, who to choose as friends and even partners.

This kind of polarization has increased since 2011 in two-thirds of the world’s countries. It can be damaging because it harms collective action within and across countries, making it more challenging to address shared challenges (see below).

Is there anything that can be done? The report suggests two things. Firstly, we must have a broader understanding of people’s motivations for the choices they make, rather than assuming that they will always, and only, pursue their own interests. Policymakers, including economic policymakers, would need to consider not only the objective merits of policies, but recognize also that how policies are framed, communicated and perceived matter too.

Secondly, it must be appreciated that the misperceptions between economic facts and economic sentiments extend to many other areas as well. Across many countries, for instance, there is a roughly 20% point gap between the actual share of migrants and the perceived share, a misperception gap that does not change much regardless of the level of income, education or political affiliation (see below).

Misperceptions exist not only about facts, but also about what others think. One striking example relates to gender social norms. Biased gender social norms are widespread, with as much as 90% of the global population harbouring a bias against gender equality.

At the same time, while the majority of people around the world support the idea that women should be allowed to work outside the home, people systematically underestimate the level of support by others. And, perhaps even more importantly, to address the challenges of polarization, people tend to exaggerate how much other groups dislike one’s own.

Thus, the untethering of economic facts and economic vibes may be part of a broader challenge of misperceptions about facts and about what others think. These misperceptions can be harmful if they perpetuate or deepen polarization.

Actions to correct misperceptions could range from providing accurate information to promoting intergroup contact and exchange. However, providing information alone may not suffice, particularly in contexts where misinformation or narratives that are used strategically by political or business leaders to perpetuate those misperceptions exist.

However, recognizing the challenge as part of a broader pattern of pervasive misperceptions could be an important first step in addressing not only the economic but also other gaps between facts and opinions.