Sunday, July 04, 2021

Panic and herd behaviour (institutional imperative) in Covid Response paper by Sajid Javid

COVID conditions predict worse decision-making. The decision-making literature shows that if we take stress and uncertainty as proxies for on-the-moment or crisis decisions, indeed decision making worsen. Stress leads to lower performance for risk avoidance, strategy, and higher-level cognitive system use, and tends to use more of System 1 (automatic), focus on short-term rewards, and unhealthy behaviors. In short, behavior becomes more automatic and less strategic, the opposite of what is actually needed at that time. 

● Better preparation for HILPs include greater respect and fear for uncertainty and non-linear risks, the building political institutions better able to cope with mounting, random events, in particular thought “circuit breakers, fail-safe protocols, and backup systems,” to protect from catastrophic losses like with COVID. And ideal crisis management style is (i) nimble: Move quickly in exponential growing problems, (ii) adaptive, i.e., regularly updating priors and action based on new information, (iii) wise: incorporate best scientific knowledge, (iv) humble: embracing uncertainty, (v) long-term: not just based on the political cycle, and (vi) effective communication. 

● COVID’s conditions favour “herd behavior” among policy makers, but it is hard to prove. Herd Behavior, sometimes known as “information cascades”, is defined as “everyone doing what everyone else is doing, even when their private information suggests doing something quite different” (Banerjee, 1992). This type of behavior is empirically common (from investor behavior in the stock market to new technology adoption) and can be beneficial or sub-optimal in models depending on context and information availability. Now, many factors that took place during COVID provided heightened conditions for herd behavior, such as empirical evidence that crisis, fear, volatility and uncertainty all increase the likelihood of herd behavior, or the interaction between global leaders’ identity grouping and decision making, as the fact that other types of herd behavior were observed in most populations (e.g., hoarding of toilet paper) and the market (massive volatility). If indeed herd-behavior took place, it would be important to consider how this behavior can negatively impact equilibria: for example, giving “first movers” out-sized influence in a final equilibrium (anchoring). However, proving herding necessitates availability of private information, i.e., some leader who took action against his/her own best judgment, which is hard to do. 


Warren Buffett calls slow herd behaviour the "institutional imperative"

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