The Real Deal

There once was an economics student who, while going to school, would sit in the campus bar at Catholic University in Rio, Brazil with his drinking buddies complaining about the hyperinflation plaguing the country, criticizing those in power who were not doing the right things to solve it.  They were sure that if given the chance, they would have the solution that would reverse the problem.

The inflation problems started in the 1950's when the Brazilian government decided to build a new capital, Brazilia.  There was not enough money in the coffers, so they started printing money. By 1990, the pattern of inflation was so entrenched, the people had lost any hope of the government being able to control it.

The rate of inflation was astounding.  Most years it was above 100%, and some of the bad months it reached 80%!  Between March 1989 and March 1990 it climbed to 5,000%.  A reputable journalist named Joelmir Beting took the official reports, did the math, and calculated that between the years of 1964 and 1994, the total amount of inflation reached 1,000,000,000,000,000% (that is one quadrillion percent)!!

President after president would come up with plans, they would fail, and then he would either be voted out or impeached.  And the cycle continued.

People would spend their paycheck as quickly as they could, sometimes running in front of the man who changed the price stickers on the cans of food so they could grab the can with the old price.

Then in 1992 with a new president came a new Financial Minister.  He didn't know anything about economics, so he called Edmar Bacha, the economist who used to complain in the campus bar.  He was invited to come up with a plan to fix the problem.  Bacha and his drinking buddy's had a plan.  They came up with a crazy one that had not been tried before.  The four friends set about explaining their idea.  First, you have to slow down the creation of money, they explained. But, just as important, you have to stabilize people’s faith in money itself.  People have to be tricked into thinking money will hold its value.

The four economists wanted to create a new currency that was stable, dependable and trustworthy.  The only catch: This currency would not be real.  No coins, no bills.  It was fake.  “We called it a Unit of Real Value — URV,” Bacha says. “It was virtual; it didn’t exist in fact.”

People would still have and use the existing currency, the cruzeiro.  But everything would be listed in URVs, the fake currency.   Their wages would be listed in URVs.  Taxes were in URVs.  All prices were listed in URVs.  And URVs were kept stable — what changed was how many cruzeiros each URV was worth.

Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros.  Every night the Central Bank would print a table of the conversion rate between a cruzeiro and the URV.

The idea was that people would start thinking in URVs — and stop expecting prices to always go up.  After a few months, they began to see that prices in URVs were stable. Once that happened, Bacha and his buddies could declare that the virtual currency would become the country’s actual currency. It would be called the real (pronounced hey-ow).

“Everyone is going to receive from now on their wages, and pay for all the prices, in the new currency, which is the real,” Bacha says. “That is the trick.”  And the idea was you would start thinking in URVs. Because just last week you got paid a thousand URVs. Milk costs one URV. Next month, you’d get a thousand URVs again and milk would still be one URV. The exchange into cruzeiros, what you actually handed the clerk would change. But the price in URVs would not.

So on July 1st, 1994, the Central Bank released the new money. Everyone in Brazil, collectively, as a country, tricked themselves into believing that this fake currency was real. More real than the actual physical bill they were holding in their hands. And that made all the difference. That made it real. For money, it’s crazy but that’s all you need; people to believe in it. Our four heroes literally turned Brazil’s economy in the opposite direction with their plan. Brazil went from being an irrelevant, economic basket-case to one of the most important economies out there. The eighth largest in the world.

Cardoso, the finance minister who hired our four heroes after admitting he knew nothing about economics, was elected president. Twice. And the four economists, despite the fact that most people don’t know them by name, really are seen as heroes. These guys made money worth something.

If you would like to listen to the one hour podcast of this story from This American Life, you can find it here.

Now you have heard something interesting.

Did you see that?

Chris Chabris, a psychology professor, and his co-researcher, Daniel Simons, a psychologist, have been conducting experiments on something they call Inattentive Blindness, or Change Blindness.

Here is an interesting YouTube video showing one of their studies. It shows study participants talking to a man behind a counter. The man bends down to supposedly get a packet of info, and another man stands up and finishes the conversation. The two men were wearing different colored shirts and had different colored hair. Chabris and Simons discovered that 75% of those in the study didn't notice the change.

How is this possible? Why would such a large portion of people not see the difference? It is because our senses are surrounded by so much data, we would be overwhelmed if we tried to process it all.  So we generally take in the most important things around us.

One day Chabris and Simons heard the story of Kenneth Conley, a Boston police officer, and decided to take their experiments from the lab to real life.

The story of Conley takes place in 1995. Just like every other police officer in Boston, he was intensely interested in the police radio report that an officer had been shot and the four black suspects were fleeing by car. There were 20 police cruisers involved in the chase all over town. It ended in a cul-de-sac when the four suspects jumped out and scattered in four directions.

The first police officer out of his car was a black officer named Michael Cox. Since he worked under cover, he was dressed in plain clothes. The next officers out of their car mistook him for a suspect and attacked him. They started beating and kicking him.

Conley then arrived on the scene and joined the chase for the suspects. He ran right past Cox who was being beaten. He always claimed he never saw it happening.  Soon after he passed, the mistake was realized and the beating stopped.

He was later convicted of perjury and obstruction of justice, because he was not believed when he said he saw nothing. He was sentenced to 34 months in prison. No other officer ever came forward or was ever identified. The official report on Michael Cox's injuries, which kept him out of work for six months, was that he slipped on ice.

Chabris and Simons wanted to find out if Conley was telling the truth The instructions to the participants were simple. Follow a jogger for a certain distance along a path and count how many times he touches his hat. This was to keep the attention on the jogger, just as Conley's attention was on the suspect in front of him. Then a minute into the run, they had three students stage a fight just off the path. With two beating and kicking a third, it seemed obvious that they would be seen.

They conducted the experiment at different times of day with both men and women. They were very surprised to find that during the night hours, the same as the Conley incident, only a third of the participants noticed the fight, and during daylight hours, only 40% saw what was happening.  Chabris and Simons proved that it was possible for Conley to have missed seeing the beating, but by then he had served part of his sentence and the rest was dismissed because of a technicality.

Chabris points out that our inability to absorb visual information coupled with our mistaken belief that we actually are able to absorb a lot of it influences all kinds of behavior.

"This underlies problems with using cell phones while driving and all kinds of situations like that," Chabris says.

There is an interesting video on YouTube that will test your inattentive blindness.  Try it out.

Now you've heard something interesting.