Bounded by Irrationality
Though we love to pride ourselves as rational beings, our rationality has limits. As Herbert A. Simon proposed, our “bounded rationality” during times of complex and trivial situations limits us from making optimal decisions.
Today, with the pandemic wreaking havoc, many decisions have been made and are being made by both common people in average households, as well as policy-makers in parliaments. However, if everyone — individuals and governments alike — was a ‘rational’ entity fully aware of their actions’ consequences, the course and magnitude of COVID-19’s economic fallout could have been starkly different. All nations could have been equally prepared for or equally unaware of the optimal pandemic response. We may not have had second waves. People may not have protested their distaste for masks and social distancing or hesitated to take vaccines. Policies could have been more future-oriented and well-planned.
Unfortunately, for us humans, the cognitive capabilities of our minds constrain us from being the ‘rational economic agents’ that mainstream economic models theorize us as. An exploration of some decisions made by governments and people thus far into the pandemic, along with a study of their economic consequences, can unravel the many cognitive delusions that we fall prey to. Delusions that hinder our rationality and risk perception which in turn affect our actions as agents in society thus creating economic disparity.
One of the major reasons behind the severe health and economic carnage of COVID-19 today may be poor decision-making in the earlier stages of the pandemic. The immediate responses to the virus and its spread are important in determining the nature and magnitude of the outcome. These responses are, in part, influenced by our subjective understanding of the risks involved in taking a particular course of action. Risk perception can be governed either by how much we know about and understand risks i.e. the cognitive dimension or by how we feel about them i.e. the emotional dimension.
Many studies in behavioral psychology and economics have explored how a plethora of behavioral biases can influence how we cognitively and emotionally process risk information. We will explore these biases in greater detail through an insightful behavioral trilogy with the following articles:
Part 1- “Pride and Prejudice” will explain how exponential growth bias and availability bias can affect our cognitive dimension of risk perception
Part 2- “It’s All in Your Head” will cover how Vaccine Hesitancy and Diplomacy may be the result of heuristics affecting the emotional dimension of risk perception
Part 3- “Pyrich Victory” will highlight the biases that can explain the shortcomings of policy-making in several countries.
Pride and Prejudice
Can we really pride ourselves in our math skills? Because if we were mathematically proficient, how did we underestimate the transmission of the virus? Don’t be hard on yourself. Your mind plays tricks that manipulate your understanding of risks.
When COVID-19 began to impact the world, individuals and governments grossly underestimated the virus’ magnitude and rate of infection. This is because, as humans, we are victims of the exponential growth bias — our minds are wired to incorrectly interpret exponential calculations and perceive them as linear ones. Studies have shown that our inability to accurately quantify the effects of compounding has influenced our understanding of the virus spread. This in turn affected individual decision-making and government responses earlier on in the pandemic.
Many media outlets, journalists, and politicians have failed to effectively communicate the exponential growth of the infection rate. For instance, many graphs present cross-country comparisons of the number of infections on a “logarithmic scale” where figures on the y-axis increase by a power of 10. If a person is subjected to this piece of information, chances are they fail to interpret the true rate of transmission as the gaps between 1 and 10 seem similar to the gaps between 10 and 100: both have been raised by the same power.
Such misinterpretation creates information asymmetry among the masses. Failure to recognize the speed of virus transmission results in the failure to estimate the risks associated with not following standard protocols of the World Health Organization (WHO). Presidents Donald Trump and Jair Bolsonaro repeatedly downplayed the growth of the virus in its initial stages by focussing on initial low absolute numbers and overlooking the virus’ impending exponential growth. Their bias may be mirrored in their opposition to social distancing measures. At the same time in March 2020, the number of infections in the United States increased from a manageable figure of 3,000 cases to 200,000 cases. The exponential growth bias is the same reason why some fail to realize the potential of interest rates on savings over a long period of time and why a few are vulnerable to escalating debts. We must be aware that our difficulty to understand basic compounding and multiplication can incorrectly influence our risk perceptions, and this ultimately presents misleading incentives that propel suboptimal decision-making. So don’t take too much pride in your mathematical abilities until you are strong enough to overpower your mind’s exponential growth bias.
Considering the earlier example, why were some countries better prepared and equipped than others? The initial rapid responses of Taiwan and South Korea stood out at a time when the world was grappling with sudden and violent COVID outbreaks. Both countries laid out effective communication strategies and ensured coordinated government responses as soon as the WHO reported the existence of a virus in Wuhan. Similarly, Kerala, a state in India surpassed its counterparts with an impressive and prompt disease control strategy that rendered it a 51.2% recovery rate in June 2020.
Can we attribute these success stories to their rationality or is it simply another bias influencing decision-making? A prejudice of the past that helped them take prompt action?
What Korea, Taiwan, and Kerala had in common was not solely good decision-making but also their availability bias, a mental shortcut that enabled each of them to rely on recent examples that came to mind while evaluating decisions and executing policies. For Taiwan and South Korea, it may have been their experience with the SARS in 2003 and MERS in 2015 respectively that equipped them with more ideal disease control approaches, along with a rebuilt and robust health infrastructure. For Kerala, it may have been their understanding and knowledge of emergency preparedness of the NIPAH outbreak that worked in their favor.
It is the availability of such immediate examples or lack thereof that determine the nature of decisions and the economic outcomes for the subsequent countries. With only 7 deaths in 2020, Taiwan’s economy grew over 3% higher than Japan, Singapore, and Hong Kong which declined by 5% or more. Many countries lacked this “availability” of a recent response framework that South Korea, Taiwan, and Kerala had in place due to which they had no benchmark or no prior understanding of the risks and costs of delayed and latent decision-making.
As much as we love to credit the meticulousness of a few countries and lament the carelessness of others, it is really just cognitive delusions that determine our risk perception and decision-making, whether as individuals or as nations.
This was about our brain’s naivete in interpreting external information. Can our emotions be equally at fault for our flawed risk perception? To know more, stay tuned for the next part of the trilogy “It’s all in your head” where we will cover how vaccine hesitancy and diplomacy may be the result of heuristics affecting the emotional dimension of risk perception.