(This article was translated from French.)
At first glance, the current health crisis looks nothing like the global financial crisis of 2007-2008. One is caused by a new virus whose exact nature, location and time could not be predicted. The other is a major economic disruption that stems from the large-scale resale of subprime mortgages by US banks in a secondary market. However, these very different crises have evolved and multiplied because of a common factor that we wish to highlight: the preponderant role of cognitive biases, that is to say the erroneous or irrational judgments that we form without even be aware of it.
Cognitive biases are default thought patterns that come into play automatically, unintentionally, intuitively, and quickly with little effort. They are not a manifestation of ignorance or misunderstanding of facts or scientific evidence. They are believed to be the result of natural evolution that favored humans in their primitive environment to be able to recognize and respond quickly to threats from predators and toxic substances or to detect the first signs of natural disasters. But these same thought patterns do not serve us well in the face of political, health or economic threats typical of today’s world, the subtleties of which are far more complex. They can explain why seizures tend to recur after long intervals of time. The pandemic offers us the opportunity to learn collective lessons that allow us to stop seeing the dramatic consequences of these crises as inevitable. To minimize the negative effects of these recurring events, we need to take a clear look at our very human ways of dealing with risk.
Before the financial crisis of 2007-2008, the risks that led to the real estate bubble were systematically ignored. The rise in house prices was then driven by a rapid expansion in the volume of mortgage loans thanks to the development of a secondary market in which mortgage securities were resold. Alan Greenspan, then chairman of the US Federal Reserve, said it was better not to regulate these derivatives, which fueled real estate speculation. Yet in 2008, he told the US Congress that he vastly overestimated the ability of financial institutions to self-regulate.
Behavioral economics experts have identified some psychological drivers of this complacency. The complex nature of the situation created a fog of confusion that obscured the reality of what was happening for all players in the credit market. This opacity has favored an availability bias, a mode of reasoning that favors information immediately present in memory rather than a global view of the situation. With the credit market having functioned reasonably well for decades, it was difficult to imagine that the mere resale of mortgages in the secondary market would lead to bank insolvency. How does this situation compare to the COVID-19 pandemic?
Lack of preparation
Experts have long recognized the very high probability of a major pandemic with disastrous health and economic impacts. It is also clear that the foreseeable benefits of preventive measures far outweigh their costs. So why haven’t countries prepared more?
Many psychologists and economists have realized the irrational nature of many financial decisions. For example, psychologist and economist Daniel Kahneman and his late colleague Amos Tversky have demonstrated through numerous experiments the irrational nature of certain purely economic decisions. They show, among other things, that a loss is felt with a much greater emotional intensity than a gain of the same value. This explains the insufficient preparation of our societies for pandemic risks. Why spend a fortune on health protective equipment when there is a chance it will never be needed? This loss aversion also manifests itself in other situations of foreseeable risk. Just consider the enormous challenge of mobilizing both individuals and nations in the fight against climate change, even if most people don’t identify as climate skeptics.
A succession of amplifying biases
Other cognitive biases seem to play an important role in pandemic situations. Avoidance behavior, a defense mechanism that is activated to avoid facing a frightening situation, leads some people to disregard health rules or even to deny the reality of the threat. Perhaps this is why much of the population did not follow public health rules regarding gatherings during the holiday season. Or why some people hesitate to get vaccinated.
We should also be wary of our tendency to apply reasoning based on anecdotal evidence, such as refusing the COVID-19 vaccine because a loved one has reacted badly to another type of vaccine in the past.
There has also been a lot of evidence recently on the psychological phenomenon of behavioral fatigue, the loss of motivation that results from having to conform to a new standard over a long period of time. Policymakers must deal with this phenomenon when considering the implementation of mandatory measures such as containment, curfews, physical distancing and vaccine passports.
Lessons from the financial crisis
In a book published in 2013, Alan Greenspan explains how several of these biases prevented most players in the credit market from properly understanding its true state before the onset of the financial crisis. Interestingly, even he, a proponent of the free market, seems to have suffered from confirmation bias, in this case the propensity to privilege information that confirms his belief that markets are capable of self-regulation and self-regulation. reject the one who denies it. This was in addition to the availability bias mentioned above.
This crisis has been disastrous due to our collective inability to put in place adequate measures to mitigate its magnitude despite warning signs that seem evident in retrospect. Because of retrospective bias, it can indeed be easy to overestimate in retrospect the ability we might have had to better anticipate events. We have accepted the proliferation of financial transactions that have allowed a disruption initially limited to the US credit market to quickly spread across the globe.
Similar lessons can be learned from the COVID-19 crisis.
The psychology of the masses … and of decision-makers
For both financial and health crises, mitigation measures could be devised, taking into account the impact of our cognitive biases. It would be useful to bring an external and disinterested look on the reflections, the conclusions and the actions recommended for the prevention and the treatment of such crises in order to highlight the influence of these biases, by definition imperceptible for those who undergo for them. In short, we need to better protect ourselves against our own failures and not just against emerging pathogens or economic mirages.
Given the difficulty for policy makers to accept the costs of preventive measures, it is advisable to leave these preparations to non-political organizations. This would follow the model of what was successfully implemented 30 years ago to control inflation, by making central banks independent from governments and from any economic or political interests. On a more positive note, it must be recognized that major health crises are also a source of major innovations. Just consider the incredible speed with which COVID-19 vaccines have been developed. It is up to all of us to continue to innovate positively in these uncertain circumstances while keeping in mind that our cognitive biases can have a perverse influence on our perceptions and actions.