Lottery thinking

The recently-released Global Economic Conditions Survey for 1Q CY14 by the Association of Chartered Certified Accountants and Institute of Management Accountants says "business confidence in Pakistan has been on the rise almost steadily for a year-and-a-half and is now higher than at any point in the last three years." But, there is no need for jubilation; for, there is more to it than what meets the eye.
The report says that 43 percent of respondents reported confidence gains, up from 36 percent in late 2013. But, it adds that "perceptions of the recovery appear to have reached a ceiling in late 2013". In fact, on a quarter-on-quarter basis, the confidence index has seen a decline.
And, why would that be so? The answer is simple if you take it logically. The source of the so-called confidence exhibited by the markets or the business community at large lies only in stability: Specifically, the macro-stability. Beyond that, there is precious little to show.
The taxation reforms are conspicuous by its absence; so are the public sector entities reforms. Similar is the story of the energy sector, and that of key regulatory institutions.
Of course, nobody was expecting Pakistan to start shining by this time of the year. But the point is that even after one year in the government-and that too with a strong majority-the PML-N hasn moved beyond the drawing board of the reforms.
Whatever little progress it did make in some areas--such as the partial resolution of circular debt--is now coming back full circle.
And this is exactly why perceptions of the recovery hit a ceiling after late 2013. On that note, though, one would like to remind the readers (and the respondents of surveys like this) two important elements of business and economic psychology.
First, is the human tendency to start finding casual relationships behind a recovery from an abysmal performance or a fall from top performance-when, in effect, things are only regressing to the mean. Pakistans recovery from the abyss in the last one year falls into the former context.
Second, is the tendency to fall prey to, what Nobel Laureate psychologist Daniel Kahneman calls the possibility effect. The possibility effect causes "highly unlikely outcomes to be weighed disproportionately more than they deserve".
Much like the lottery ticket holder, who is willing to spend far more on the tickets than her probabilistic chance of winning, those basking in the hopes of recovery are only dreaming a nice dream. All others are waiting for the actual reform process to start before they can really call it recovery.