Policy makers can counteract how sentiment triumphs over facts, according to a discussion paper released by the Reserve Bank of Australia.
The role of data and artificial intelligence has surged in the past five years, including the engine behind the work of RBA researcher Gianni La Cava in the "animal spirits" paper issued on Tuesday.
Rather than using economic and financial evidence to make decisions, he examines how companies can be led by sentiment or "animal spirits" when making investment decisions.
"If sentiment shocks can affect corporate behaviour independently of fundamentals, this suggests that there may be a role for policy to manage business cycle fluctuations by influencing the expectations of corporate managers," Dr La Cava said.
He recommended investing more resources in the tools that can help decision makers identify what is news and what is noise.
Machine learning techniques and extracting information from non-traditional sources of data, such as text, audio and visual media would help, he said.
Machine learning uses artificial intelligence (AI) to access and crunch large amounts of data and develop programs that result in swifter and more accurate decisions.
Filtering spam into junk mail, diagnosis of health scans, financial software to detect dodgy transactions, or predicting the price of commodities and the budget impact, all use AI-based predictions.
While low sentiment and heightened uncertainty were important contributing factors during the global financial crisis, Dr La Cava said they have not obviously weighed on investment since that time.
But having a variety of policy communication channels that target business decision-makers could matter, including speeches, business liaison programs and surveys dedicated to measuring the beliefs and uncertainties of respondents, he said.
"Animal spirits" was a phrase coined by 20th century economist John Maynard Keynes who backed government intervention rather than the free market to grow jobs and solve economic woes.
Australian Associated Press