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Posted at 03:47 PM ET, 06/07/2012

The pain in Spain falls gently on the brain

Spain's economy is about to implode.

But, according to a May Gallup poll, the gap between the dire importance of the European debt crisis and the 16 percent of Americans following the story “very closely” strains credulity. (Although it’s worth noting that just under half — 49 percent — are following the crisis at some level.) Certainly, we’ve had our warnings with Greece, Portugal and Ireland, all of which have sought bailouts of one form or another. With Spain, the Eurozone’s fourth-largest economy, the stakes are even higher. So, why the cognitive dissonance here?

Nobel Prize winner Daniel Kahneman would say that the typical heuristics that we are using to understand economic activity in Spain are leading to severe and systematic cognitive biases. In other words, the time-saving rules of thumb that we use to understand the financial world’s complexity contain a number of errors. After all, most problem-solving tools that we use are just a quick and dirty way to make sense of the world based on prior experiences and intuitions.

Greece and Portugal haven’t imploded (at least not yet). So, there’s no way that Spain can implode...right? Deep down, we believe that governments are just too big to fail. That’s the "availability heuristic" in a nutshell. We reach into our minds for available examples, grabbing the ones that are easiest to remember, assuming that we remember them because they are important.

The heuristic and its intellectual cousin the Shorthand Abstraction are now a popular concept in fields ranging from economics to psychology. But what if the heuristics we use contain the seeds of their own failure? What if we can’t recognize the cognitive biases that they lead to? In many ways, we rely on heuristics because the world is supposed to respond in certain ways to certain actions, and when it doesn’t, we find ourselves gaping into the void and wondering: What just happened?

A quick primer on heuristics should be required beach reading for those enjoying summer vacations in Spain and Greece. Kahneman’s Thinking Fast and Slow , which outlines our biases, fallacies, effects, illusions and neglects that we use to get through the day may also be in order. Remember: Heuristics are nothing more than a useful rule of thumb for making sense of the world, which are often based on prior experiences rather than any underlying theory. As a result, the future always has a way of catching us by surprise. All of that is to say, you should probably be reading about Spain.

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