Tuesday, October 02, 2007

The Seven Effect

A lot of people have compared the recent financial crisis to the crisis of 1907. It’s interesting that the time difference is exactly 100 years, but it’s easy to call that a coincidence. The modern economy hasn’t been around long enough, hasn’t provided enough data to say whether the 7th year of a century has been a more likely occasion for a financial crisis, and there’s no particular reason (that I know of) to think that it would be. But it’s vaguely interesting that both years end in 7: there are enough years ending in 7 that one could look for a correlation in the actual data if one thought there were any point in doing so.

The story gets more interesting in the light of a piece by financial historian Harold James (hat tip: Greg Mankiw). Without any apparent inclination to look specifically for sevens, he comes up with three years that he thinks are better parallels for 2007: they are 1837, 1847, and 1857. Since only 1 in 10 years end in 7, the chance of pulling 3 such years by random chance is 1 in 1000. That’s looking like statistical significance, considering that we already had an empirical basis for the hypothesis that there is something special about 7. Thinking back over the last two decades, I also recall that that the great Asian financial crisis began in 1997, and the US stock market crash happened in 1987.

Perhaps this is still all coincidence, but it seems that, if someone could think of a reason why financial crises are more likely in years ending with 7, it would make sense to listen to that reason. (Maybe the “lucky number” 7 makes people more inclined to take imprudent risks? Maybe there is a pattern of confidence-building during each decade, and it reaches an unstable point after 7 years?) Anyhow, this “seven effect” should fit nicely into my delusional system, along with the nine-zero effect wherein decades boom at the end and crash at the beginning.

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8 Comments:

Blogger Gabriel M. said...

It has been foretold.
Read the runes. The end is near!

Wed Oct 03, 01:03:00 AM EDT  
Anonymous Anonymous said...

One man said it was due to the 10 year corporate planning cycle. I don't know how to verify or invalidate this hypothesis.

Thu Oct 04, 07:09:00 PM EDT  
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