In medicine, “zebra” describes an instance when the doctor diagnoses an unlikely but eye-catching condition instead of a less noteworthy but more probable one that also fits the symptoms. Professor Theodore Woodward of Maryland University coined the expression when he admonished his students “When you hear hoofbeats, think of horses not zebras.”
As the zebra phenomenon illustrates, even experts tend to judge more memorable events as more likely – a bias known as availability – and to remember unusual events more clearly than more mundane ones. Uncorrected, such predispositions can lead to bad prescriptions, whether in medicine or further afield.
Woodward’s rule-of-thumb came to mind as policymakers around the world reacted to the announcement of Libra, the Facebook-led digital currency that is to launch in the first half of 2020. To say that their responses struck a note of caution is an understatement. Representative Maxine Waters called on Facebook to halt the project. Her Senate ally Sherrod Brown warned that “we cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account.” The international reactions were perhaps less shrill but not much warmer, with French Finance Minister Bruno Le Maire openly worrying that Libra might dispute states’ currency monopolies.
Hearings before the House Financial Services Committee, which Rep. Waters chairs, and the Senate Banking Committee, of which Sen. Brown is the Ranking Member, are due to take place on July 17 and 16, respectively. Policymakers here and elsewhere, however, appear to already have made up their minds about Libra.
In so doing, I fear that the gatekeepers of the global financial system are mistaking horses for zebras: focusing on improbable risks and discounting the tangible but less headline-grabbing benefits of a global low-cost payments application such as Libra’s founders envisage. Because Facebook is leading the effort and marketing Libra as a cryptocurrency, the official responses are informed more by connotation (risk, monopoly, market power, data abuses), than by any actual knowledge concerning what Libra will do.