During a pandemic, people change their behaviour radically and this change affects the global economy beyond the effects of a temporary shutdown of businesses.
Social distancing, mask use, remote learning, home-based work, and not in the least self-isolation, all cause disruptions to how businesses operate and we don’t have a particularly clear picture how long the effects will be felt for.
But perhaps we can get a better idea of how pandemics affect public behaviour and economic growth by revisiting past pandemics and reading them with a behavioural lens, Varun Gauri, who previously was the founder and co-head of the World Bank’s behavioral science unit, says in an article for Behavioral Scientist magazine.
In a crisis, individuals are not just making decisions based on their own biases and heuristics, but are also responding to a greater degree to the behaviour of other individuals and organisations, each acting under the influence, and in a novel context, of multiple biases, heuristics, and mental models, Gauri says.
“In the case of COVID-19, people and organisations have varying risk perceptions and appetites, mental models of disease, dispositions to cooperate, stereotypes of outgroups, and trust in government and science,” he says. “Understanding interactions like these is the realm of behavioural game theory.”
In the case of COVID-19, people and organisations have varying risk perceptions and appetites, mental models of disease, dispositions to cooperate, stereotypes of outgroups, and trust in government and science,” he says. “Understanding interactions like these is the realm of behavioral game theory
Gauri’s comments mostly address the question of how behavioural science can assist in developing public policy, but he also touches upon economic and investment issues.
Changes in public behaviour flow on to local economies, as they affect consumption, employment, corporate profitability and so on. It can be helpful to look back in history through a behavioural lens and see how organisations, society, and individuals reacted to the various interventions during previous pandemics.
Some studies that applied this technique were helpful in the early response to the unfolding crisis, Gaudi says.
“They were able to assess how various interventions, and their timing, changed behaviours and epidemiological and economic outcomes,” he says.
One study, from the US National Bureau of Economic Research published in March and updated in April, was particularly helpful and looked at which pandemic most closely resembled the current pandemic and extrapolated its conditions to the current situation.
The researchers found that the Spanish Flu of 1918-20 formed the best proxy for a ‘worst case’ scenario of how the current pandemic might unfold. They calculated that under this scenario a typical country might face a decline in gross domestic product by 6 per cent and a decline in private consumption by 8 per cent.
The results also show that the 1918-20 pandemic was accompanied by substantial short-term declines in realised real returns on stocks and short-term government bonds, while inflation temporarily increased.
Under these assumptions, we are facing a financial shock akin to the Global Financial Crisis of 2008-09.
But Gauri also points out that, so far, little has been done to put a formal behavioural framework in place to deal with these large scale disruptions of modern life.
“We can and should develop a behavioural playbook for crises,” he says. “This pandemic is far from over. There will be another. Have you heard anyone say we aren’t ready for climate crises?”
It is a point that Eugene Chan, Associate Professor of Consumer Science at the Purdue University in the US, agrees with.
“This is an interesting note that Varun raised,” he says in a note to [i3] Insights. “His thesis is basically that there is little experience to draw on in history to show how behavioural responses can apply and be promoted during the current COVID-19 pandemic.
“I think this is largely because pandemics by definition are far and few in-between. The Spanish flu pandemic was over 100 years ago when behavioural science didn’t exist.
“We have some experience with SARS in terms of how to get people to use hand sanitizer and to promote basic personal hygiene, but by all accounts, the situation with SARS was much smaller – and much more localised, largely to China, Hong Kong, and Toronto, Canada – than the current COVID-19 pandemic. So, there is little to draw on,” he says.
Superforecasting
Gauri also makes an interesting observation about the speed at which new policies and responses need to be developed. No longer can one rely on traditional scientific techniques, such as randomised controlled trials, as these methods take too long to take action.
Instead, we should develop a form of experienced intuition, not unlike the skills of the superforecasters portrayed in the 2016 book of the same name by Philip Tetlock.
Superforecasters estimate a probability of an occurrence and review the estimate when circumstances contributing to this estimate change, with particular care to eliminate personal bias, while incorporating input from other forecasters.
This is particularly helpful in assessing which intervention in public and corporate life is working well and which is causing unnecessary financial hardship.
“Paul Volcker is reported to have said, ‘In a crisis the only asset you have is your credibility.’ That’s for leaders. For policy professionals, in a crisis your main asset is your experienced intuition,” Gauri says.
Paul Volcker is reported to have said, ‘In a crisis the only asset you have is your credibility.’ That’s for leaders. For policy professionals, in a crisis your main asset is your experienced intuition - Varun Gauri
“It would be useful … to pre-register, systematically, our guesses for which interventions work best, and go back and learn where we got it wrong or right, so that we can refine our behavioural intuitions,” he says.
But Chan says we should be able to do better than guess here, as there is a substantial body of knowledge to draw on.
“Behavioural sciences have decades of knowledge, both theoretical and practical,” Chan says. “While it might not be practical to run controlled experiments to test interventions at this time (these experiments take time, sometimes months), there is knowledge to draw on.
“Basic behavioural scientific theories can readily apply. For example, people respond to incentives, and so government mandates about social distancing work.
“But research has also shown that people are more likely to behave in a manner if they see such actions as bettering themselves and this is a basic theory in behavioural science that can readily be applied.”
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