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Go Figure: The great business confidence gap

  • 5 January 2012
  • From the section Magazine
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Man looking at change, business executives clapping

It's hard to explain why business leaders can be so pessimistic about the economy while being optimistic about their own company, writes Michael Blastland.

Most business people think the economy is on the slide. No surprise there. Business sentiment is often in the news.

But most business people also think - and we hear much less of this - that their own business is doing much better.

Curious. Can both beliefs be accurate?

It's a bit like everyone believing they're above average. To pose the obvious question* - how can most people do better than the norm?

Explanations later. What can be true is that one person is OK and everyone else is not. But it cannot be true that everyone is that one person. They can't all be exceptions.

But something not far from this seems to be the normal result of business surveys. Take this one for the Confederation of British Industry (CBI), conducted by Ipsos Mori from 4 October to 4 November, in which 70% said their level of confidence in the economic outlook had decreased from August, but only 30% said their own prospects declined.

As Ipsos Mori says: "Boardrooms are less likely to believe their own prospects have been affected."

Big differences appear despite a nudge by the pollsters towards consistency. The survey questions invited people to link their view of their own business with the answer they'd already given about prospects for the economy.

The language changes a bit between questions, from "confidence in the economic outlook" to "prospects for your business" which might explain some of the difference.

But other surveys suggest that it's to do with more than just semantics.

If this one from New Zealand is anything to go by - in which slightly more than half of those surveyed said their own business would improve but only a third said the economy would, or this one in London conducted for KPMG and the CBI - in which more than twice as many people felt optimistic about their own business as felt optimistic about the economy as a whole - such mixed expectations are common.

OK, the big question: What explains the apparent contradiction?

Well we're talking about belief here not fact. And beliefs can be, by varying degrees, wrong. Maybe those polled are right about the economy as a whole but wrong about their own prospects. That could plausibly be explained by too much self-confidence. They're wrong to think they're better than most.

Or maybe it's the other way round. They're right about their own businesses - these are the businesses they know best after all - but wrong about other people's. But it's what they think about other people that determines their views on the economy.

If true, that's weird too. Usually, most people prefer the evidence of their own eyes to that of hearsay or even aggregated data.

Is this a case where they accept that their own evidence is trumped by what they see and hear elsewhere? Can it be that in this instance business people don't believe the evidence of their own stories, except perhaps as proof of their own exceptional ability? If so, why?

Shopping bags
Is business reporting to blame for the mismatch?

Ipsos-Mori highlights a few verbatim comments from its surveys. On the question about general economic prospects, this was top.

"Watch any TV programme or pick up any newspaper, the economic forecasts are all negative and the level of activity is decreasing."

Oh dear, our fault again - the media.

Or maybe both beliefs are a bit wrong and the truth is nearer the middle.

Which raises another question - are we reporting business sentiment properly when we concentrate on views about the economy in general, rather than using these surveys as a snapshot of first-hand experience?

That is, if we use business surveys to make a big deal of what people think about the general state of the economy, are we simply making news out of what people see in the news?

If so, would there be more value in reporting what they think about themselves than what they think about others? If we did, the business world would look more optimistic… or maybe, depending on your view of where the truth lies, more deluded.

* Beating the norm

There is another possibility. When I said that not everyone can be above average, it was only just true. Most people can be above average when we use average to mean the arithmetical mean. To see how, think of how many people have more than the average number of feet. Nearly all.

Applied to business surveys, this means that just as nearly everyone can have more than the average number of feet, so could nearly all businesses be doing better than the economy as a whole if the few parts of the economy that are doing worse are doing spectacularly worse - and so tilting the average performance of the whole economy below the experience of the majority of those who happen to be included in business surveys.

Another caveat - surveys of expectations do not all, or don't necessarily measure the absolute level of optimism or pessimism, they just measure how much those levels have changed. Some of these surveys are also small, the Ipsos-Mori/CBI survey was of 122 "business leaders" from the larger companies, though the New Zealand survey, for example, is of 1,000 smaller businesses - and produces similarly mixed responses.