The uncertainty caused by coronavirus can be felt around the world right now. In any health crisis, our first concern is for those afflicted and the wellbeing of ourselves and loved ones. However, business closures, cancelled flights and falling stock prices can also have dramatic effects on the financial wellbeing of families. The combination of uncertain income and our instinct to stock up on essentials could have lasting effects on people’s wallets. When we are controlled by our fear, we become susceptible to certain biases that make us spend more, save less, and buy way too much toilet paper.
Herding has been studied a lot in behavioural economics, crowd psychology, and even philosophy. The effects of herding are evident when people do what others are doing instead of making their own impartial decisions.
If everyone else on the Titanic is running for the lifeboats, you’re going to run too, regardless if the ship’s sinking or not.
- Steven Tyler
Herding behaviour affects us all the time, but the effects are increased by various factors such as fear and uncertainty (sound familiar?). This is why we end up bulk buying toilet paper and disinfectant wipes. We see everybody else filling their cart and quickly reason that it’s something we should be doing too.
Loss aversion means that losing something feels worse than having it in the first place. If we later realize we needed toilet paper and didn’t get it when we had the chance, we’ll feel really bad. In the case of a natural disaster, most people have a good idea of what they may need if the power goes out or if there’s a water shortage. The effects of COVID-19 still aren’t clear, which creates a lot of uncertainty about what we need, and how long it needs to last. Loss aversion makes us stockpile lots of things just in case to avoid feeling bad down the road. Our brains tell us to buy as much bread and milk as possible right now because we don’t know if we’ll be able to buy these items in the future.
It’s easier on our brains to use recent experiences as the baseline for what will happen in the future. In the case of COVID-19, recency bias can have drastic effects on things like the stock market. When the market is down, we convince ourselves that it will never climb back up, so we cash out our portfolios. A lot of people are also drawing comparison to the 2008 crash, which was the most recent event of a similar magnitude. This analogy can cause even more panic and push the market down even further. The truth is, we are the market. When global events push us to behave in unison, our instincts (whether good or bad!) create our reality.
Licensing is when we permit ourselves to do something “bad” because we’ve done something “good.” Currently, we are at risk of licensing because we’ve checked the boxes preparing for isolation, and being stuck at home (well, most of us). Therefore, we anticipate we won’t be spending a lot of money any time soon, like on dinner with friends, morning coffees, or the movies. Unfortunately, this type of behaviour often makes us spend more than usual. You may find yourself making more in-app purchases, online shopping, buying books or signing up for new subscriptions. You may also find yourself ordering food more often, saving your stockpile for the uncertain future.
The uncertainty of COVID-19 causes our survival brains to kick into overdrive, resulting in out of the norm behaviour. Slow down, stay calm and ask yourself, “What are the motives behind my actions?” Are they practical, "I only have a few rolls of toilet paper left, I should buy some more." Or are they reactionary, "I better buy all the toilet paper I can carry before it's all gone!" It’s important to be prepared, but remember that this situation is temporary. Don’t let public panic cause you to forget about your financial future.
Behavioraleconomics.com (Date unknown). Herd Behavior. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/herd-behavior/
Lufkin, Bryan. (2020, March). Coronavirus: The psychology of panic buying. https://www.bbc.com/worklife/article/20200304-coronavirus-covid-19-update-why-people-are-stockpiling
Manuel, Dave. (Date unknown). Definition of Recency Bias. https://www.davemanuel.com/investor-dictionary/recency-bias/
Richards, Carl. (2012, February). Tomorrow’s Market Probably Won’t Look Anything Like Today. https://bucks.blogs.nytimes.com/2012/02/13/tomorrows-market-probably-wont-look-anything-like-today/
Berggruen Institute. (2020, March). The Coronavirus Presents Us With An Opportunity. https://www.berggruen.org/the-worldpost/articles/the-coronavirus-presents-us-with-an-opportunity/