If we view markets as prediction systems, there is a great example of self-fulfilling prophecy in the form of the Black-Scholes option pricing model. Before its publication, the price of options were very random, and the prices could be almost anywhere. Once a (supposedly) normative model for prices was available, people’s willingness to trade converged to those prices fairly quickly.
(This simplifies slightly, because part of the B-S model was arbitrage, which allowed markets to reinforce these “correct” prices, but it’s a useful example of when a prediction can stabilize the system.)
Another possible example:
If we view markets as prediction systems, there is a great example of self-fulfilling prophecy in the form of the Black-Scholes option pricing model. Before its publication, the price of options were very random, and the prices could be almost anywhere. Once a (supposedly) normative model for prices was available, people’s willingness to trade converged to those prices fairly quickly.
(This simplifies slightly, because part of the B-S model was arbitrage, which allowed markets to reinforce these “correct” prices, but it’s a useful example of when a prediction can stabilize the system.)
For anyone interested, the keyword to read about things like this in the economics literature is “performativity”
Thanks—this is super-helpful! And after looking briefly, a citation for the above example is here.
Thanks to both; this is a great example; I might add it to the main text