Today I’m delighted to publish the first of an occasional series of guest blogs. Here, Paola Lombardi, a behavioural economist, explores what’s really going on in our thoughts in a time of crisis.
From a behavioural point of view, from countries, to companies, to individuals, it’s fascinating how the Coronavirus pandemic is changing our lives. From the micro decisions (seen mostly at the outset) such as choosing whether to do an elbow bump, a namaste or a foot-tap, to the macro ones such as closing schools and businesses or banning big gatherings, the whole world is changing the way we interact with each other.
As a behavioural economist, the current state of affairs presents a fascinating opportunity to look into the common cognitive biases at play as a result of this pandemic.
The first one that comes to mind is hyperbolic discounting. Hyperbolic discounting is the tendency to put more emphasis on the short term, while paying less attention to mid and long-term outcomes (like the person who, instead of saving for retirement, spends their extra cash on short-term rewards, like clothes for dining out). We see this in some enterprises who remain ‘open for business’ (albeit working remotely) without having a true contingency plan should their employees wind up sick and unable to work, or the Board be unable to convene enough directors to make decisions.
The second cognitive bias that comes to mind is the normalcy bias. When the normalcy bias kicks in, we underestimate the potential results of a new situation, by simply assimilating it to a past situation and acting accordingly. Early on, this bias showed in thinking such as ‘I had the flu last year and I kept on as normal. This virus is similar to the flu, I don’t see what all the fuss is about.’ We also saw it in motion when government guidelines asked for ‘social distancing’ and people still travelled to the Lake District for country walks, disregarding the advice until it became the norm for people to adhere to it.
The third and last bias that comes to mind is the illusion of control. One interesting way of looking at the illusion of control is that it is closely linked to the planning fallacy. In both biases there is a tendency for people to overestimate the control they may exert upon a situation or event. Sometimes this belief is (kind of) rational, i.e., ‘if I study, I will pass the test’, but many times it is completely irrational: there is a study, for instance, that found that gamblers tend to roll dice harder if they want a high number and softer if they need a low number. In sum, the belief is that if we make plans, the future will go according to them – ‘if I stockpile toilet roll/ask my employees to work from home, everything will be fine’ – which renders us unprepared should things go awry.
The point about looking at these behaviours is simply to acknowledge that they can influence how we make decisions, but not what actually happens. Plans of any kind need to be flexible enough to cater for the possibility that we don’t have control, and it is not like anything we have seen before. I hope you all stay well.