Investors who lost money by betting against the Israeli economy since the October 7, 2023, Hamas terrorist attacks would be right to ask why the so-called experts whose recommendations they followed got it wrong and how to avoid making the same mistake again.
Behind their error is what is referred to in behavioral economics and psychology as the “focusing illusion” (or “focalism”), a cognitive bias whereby people narrowly focus on biased or incomplete information at the expense of other, pertinent, information. This is especially relevant as the new Trump administration takes office and analysts once more start reading the tea leaves.
Throughout 2024, analysts sounded a steady drumbeat of gloom and doom about Israel’s economy. In September of that year, Moody’s downgraded Israel’s credit rating by an unprecedented two notches and even warned it could fall into “junk bond” territory.
S&P also issued a downgrade, predicting an intensifying conflict with Hezbollah and subsequent economic fallout. Major news outlets, including Bloomberg, The New York Times, and The Washington Post, as well as think tanks, joined the chorus of pessimism.
They were all wrong. Instead of going down, the Israeli stock market went up more than 30% in 2024. It outperformed all major stock indices, including the NASDAQ 100, the S&P 500, and the FTSE 100. In 2024, Israel also enjoyed the third-highest level of venture capital investment on a per capita basis, trailing only Singapore and the US. By year-end, Israeli start-ups had raised more than $12 billion, an increase of 31% over 2023.
View of the Tel Aviv Stock Exchange. November 29, 2020. (credit: MIRIAM ALSTER/FLASH90)
How experts got it wrong
Remarkably, during the 12-month period following the start of the war, Israeli start-ups raised more investment than any other tech hub except San Francisco, New York, and Boston.
INVESTORS WHO ignored the doomsayers made fortunes. In January 2024, Pershing Square’s Bill Ackman, for example, purchased a 5% stake in the Tel Aviv Stock Exchange for around $25 million. By year-end, that investment had approximately doubled in value.
The focusing illusion has been shown in our and others’ research to affect perceptions, distort valuations, and even lead to irrational choices.
In Israel’s case, this thinking error likely led many analysts to focus on dramatic headlines that portrayed it as alone and trapped within a “ring of fire” of hostile neighbors while ignoring its military prowess, technological capacities, and population’s resolve (as Hamas, Hezbollah, and Iran have since learned).
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Experts may have also focused on the thousands attending protests (instead of factoring in the hundreds of millions who didn’t), believing this heralded a shift in US public opinion that would isolate Israel economically.
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In sum, on reaching their dismal conclusions about the Israeli economy, the analysts’ focalism led them to adopt a myopic perspective that overlooked evidence of Israel’s underlying economic, geopolitical, and demographic advantages. Looking at that would have led to a very different conclusion.
On technological and entrepreneurial capability, Israel scores an A+. As we have shown in our research on tech ecosystems, the US, Israel, South Korea, and Taiwan form an elite group of innovation leaders that consistently outperform other developed economies in the percentage of GDP invested in R&D (“innovation input”) and US patents issued per capita (“innovation output”).
True to its brand as the Start-Up Nation, Israel has one of the highest numbers of start-ups per capita in the world, along with advanced-stage tech companies and hundreds of R&D centers of US and multinational tech companies. It is not accidental that so many US tech companies operate such centers in Israel. While Israel is largely poor in natural resources, it’s rich in human capital – the collective knowledge and competencies of a people.
Industry observers have long recognized the unconventional perseverance, creativity, and can-do attitude of Israelis. Those qualities are rooted in Jewish history. Some countries’ economic paths follow, in Talmudic terms, a “short-long way.”
These nations possess abundant natural resources, but should these resources dissipate, the road to prosperity becomes infinitely long. By contrast, Jews and Israelis have been forced to take the “long-short way,” achieving 3,500 years of growth in the face of expulsion, massacre, the Holocaust, war, and terror.
To survive, they have had to develop the polar yet complementary traits of tenacity and agility, mutual responsibility and oppositional thinking, and passion and practicality.
These are exactly the hard-to-measure traits that in our scholarly work and experience we have found to define successful entrepreneurs and innovators.
Another key underlying strength is that Israel has avoided the demographic deficit in almost all other developed economies. Between 2013 and 2023 (2024 data isn’t yet available), Israel had the highest population growth rate among all G7 countries.
Among the OECD’s 38 member countries, Israel ranks first in birth rate, with almost three children per woman, nearly twice the OECD average. (Even the fertility rates of secular Israelis exceed the OECD average.) The country’s natural growth is augmented by a steady inflow of skilled immigrants, a factor that research has shown to boost entrepreneurship.
Some experts have predicted a post-October 7 “lost decade” for Israel due to defense-related financial burdens. Again, focalism has led those analysts to miss the bigger picture.
Since its rebirth in 1948, Israel has had to tightly integrate defense and civilian innovation (which most leading tech economies don’t do). Having leveraged this dual-use innovation ecosystem in the past to become a powerhouse in cybersecurity, Israel has done so again to defeat its enemies and become a defense industry leader – with a unique battle-tested portfolio of missile defense, drone, and cyber defense technologies.
Geopolitical shifts have generated a massive worldwide increase in defense procurement, and other nations are buying from Israel. Indeed, in 2023 and 2024, Israel has already achieved record sales to allies in Europe and Asia as well as Abraham Accords countries.
A close cousin of the focusing illusion is “confirmation bias,” the tendency to selectively favor information that confirms existing beliefs while ignoring or minimizing contrary data.
The interplay between these two errors can explain why even experts are sometimes prone to tunnel vision and fashionable groupthink, creating self-reinforcing cycles of biased information consumption and dissemination.
With a new US administration taking office and the global scene always providing new crises, you can be sure that commentators, analysts, and experts will continue to make bold predictions in this fluid economic and geopolitical landscape.
Astute investors will be aware that even experts can fall victim to biased thinking.
Ran Kivetz, Ph.D., the Philip H. Geier professor at Columbia University Business School, is an expert in decision-making, including the intersection between behavioral economics and political science, and in hi-tech strategy and entrepreneurship. Jonathan M. Barnett, the Torrey H. Webb professor at the University of Southern California Gould School of Law, is an expert in antitrust, intellectual property, and innovation policy.
