Groupthink can grow on a large scale through social media, potentially resulting in economically damaging “waves of collective irrationality”, the Bank of England's chief economist has warned - AFP

Social media echo chambers could spread false ideas about the economy, leading to groupthink on a vast scale and undermining growth with “waves of collective irrationality”, the Bank of England has warned.

The economy could be “destabilised” if workers, consumers, house buyers and even businesses end up seeing the wrong information and believing incorrect “popular narratives”, said Andy Haldane, the Bank’s chief economist.

Users can filter and select the stories and opinions they want to see, becoming cut off from other news and so receiving no challenge to their views. This risks false narratives spreading with potentially little way to inject reality into the news consumed by growing numbers of people, particularly younger adults.

As a result mass groupthink could emerge with incorrect ideas about the strength of the economy, leading to bad spending and saving decisions, affecting jobs, the housing market, investment and the entire economy.

“It results in news narratives which are more likely to be self-reinforcing and self-referential than in the past. The echoes in this chamber are louder, reach further, last longer,” said Mr Haldane in a speech in Estonia.

Bank of England chief economist Andy Haldane has ramped up his visits to schools and to regions across the UK in an effort to explain the economy more clearly, and to learn about everyday economic conditions Credit: Bank of England

“They are also less likely to be balanced and objective. More powerful, but less balanced, popular narratives are a potentially destabilising influence on expectations and the economy.”

Mr Haldane compares the potential harm caused by social media to the 19th century idea of ‘the madness of crowds’, in which all members of a group or network adopt the same irrational stance.

“This originates in the contagious spread of opinion through networks. The larger and more connected the network, and the less well-informed its participants, the greater the chances of irrational epidemics spreading,” he said.

“The desire to conform to group type has its roots in our hunter-gatherer past. It has been found, time and again, in studies of human behaviour from the South Sea Bubble to the dotcom bubble, from the Bay of Pigs to the space shuttle disasters. This collective irrationality sometimes goes by the name ‘groupthink’.”

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Mr Haldane warned this could be supercharged by social media as large networks form online, deliberately excluding voices with different opinions.

“These psychological roots may have been fed and watered by technological advances, such as social media. This has increased our digital connectivity. It has probably also increased the chances of self-reinforcing and self-referential waves of collective irrationality taking hold,” Mr Haldane said.

“If so, these waves of collective irrationality could be becoming larger than ever. While a vestige of our hunter-gatherer past, the madness of crowds can these days spread to a global village.”

It has long been known that confidence and sentiment can drive behaviour in markets and the wider economy.

John Maynard Keynes, one of the 20th century’s most influential economists, popularised the idea of ‘animal spirits’ driving economic and market cycles when he overhauled thinking on the economy in the wake of the Depression.

The Bank of England and other economists closely monitor sentiment now, such as consumer confidence and business investment intentions, to see how the economy could behave in the near future.

Mr Haldane said the Bank can learn from “folk wisdom” of ordinary people to help it understand the economy better.

“The lived experience of everyday people making everyday decisions is what makes the economy tick (and sometimes tock),” he said.

“Tapping that lived experience can add to the Bank’s understanding of the economy and help it when setting policy to keep the economy stable.”

But he added that officials including him need to work harder to explain the true state of the economy to the public in a way that punctures the “group think” of social media.

One option is to give the public “personalised scorecards” explaining what interest rates mean for them.

“Casting the impact of monetary policy in terms of averages or aggregates tends not to resonate with people’s personal experience,” Mr Haldane said.

“Spelling out the benefits in personalised terms can potentially increase understanding and awareness of central banks’ actions.”