Falling into the trap of any of the following economic fallacies hinders the development of a rational, objective economic perspective.
The Post Hoc, Ergo Propter Hoc Fallacy
Latin for, "after this, therefore because of this," the post hoc fallacy is the false conclusion that one event caused another simply because it occurred first. For example, suppose that a business hired a new secretary. In the weeks following, sales increased by 75%. Did the new hire cause the 75% increase in sales? It would be easy enough to assume so, but that assumption doesn't account for advertising campaigns, a new product launch, or any other business activity that could have influenced sales in the same period.
Confusing Correlation and Causation
Correlation indicates that two events or processes are associated in some way that is measurable, dependable and many times predictable. A pattern might have emerged where the sales of products k and m increase together, indicating a correlation.
Causation means that one event causes another. Did the increase in sales of product k cause the sales increase of product m? Conversely, could the sales increase of product m have caused the same reaction in product k? It is impossible to tell, but to assume one caused the other is incorrect. There could be other, unknown factors at work, or it could simply be a coincidence.
The Fallacy of Composition
This is the mistaken assumption that what is true for one must be true for all involved. Consider the following economic example: a local movie theater cuts their entrance fee by 50% and sells 80% more tickets. If the other five local movie theaters all follow suit, will each enjoy an 80% increase in sales? It is not likely, because supply at that price will then far exceed demand. What works for one does not necessarily work for all.
Other Traps to Avoid in Economic Theory
Emotionally biased, or loaded, terminology can negatively influence a person's ability to rationally analyze economic issues. Reading material might have a decided slant based on the author's opinion. It is important to recognize that words like "outrageous," or "ludicrous" are not technical terms and are meant to sway opinions on a subject.
Personal biases are also harmful to fully understanding economic theory. Biases prevent people from seeing the whole picture. Their preconceptions on international aid or corporate governance must be checked at the door if they are to rationally consider new economic theories and policies on those subjects.
For more information on economic fallacies, refer to McConnell, Brue and Barbiero's Microeconomics, 10th Canadian Edition (McGraw-Hill Ryerson Ltd, 2005).
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