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Coronavirus: The Economy of Anxiety

Dhe fear has many faces. Aircraft that don’t fly. Streets and exhibition halls that remain empty. A cruise ship that finds no port for days. A bar chart, colored red on a black background, which measures the number of infections rising daily. Since Covid-19, the novel coronavirus, came across the world, the fear of the consequences of this novel lung epidemic has been eating through our lives. Will the plague grow into a global pandemic? How soon will it be possible to find a cure? When will China be able to contain the plague? If any?

The world of business is not exempt from all these questions, on the contrary. A lot of what happens because of Covid-19 has direct consequences for businesses, consumers and investors. The virus is gradually paralyzing important transport links, not only in China, where several million cities have been isolated for three weeks. But also between continents, because freighters do not run out and flight connections are cut. Many companies in China are at a standstill, causing the global supply chains to gradually stall. And the longer this condition persists, the more dangerous it becomes.

Source: WORLD infographic

And not just because of the direct consequences. But also because the virus, about which so much is still unknown, changes our behavior. Should I still book a long-distance trip? To throw a party? Attend mass events like a soccer game or concert? Use public transport? So far there are only 16 registered coronavirus infections in Germany. In a country with 81 million inhabitants. The likelihood of getting infected is extremely low at the present time. It is about as likely to be struck by lightning. But it doesn’t matter. The theoretical risk alone, that you may become infected, because the virus may have been going unrecognized for a long time or will soon get out of control, leads to people being afraid. And adjust their behavior accordingly.

The scientists call this the “economy of fear”. It is a phenomenon that is still far too little researched. The irrational behavior of people can cost billions. For example, by governments adopting inefficient measures based purely on symbol policies. Or perhaps because consumers make disadvantageous decisions for them.

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“Above all, shock risks are what scare people,” says the well-known scientist and director at the Harding Center for Risk Competence, Gerd Gigerenzer in an interview with WELT. This refers to phenomena in which many people are suddenly injured or die. Airplane crashes are part of it, for example, terrorist attacks or epidemics like the current plague from Wuhan.

Gigerenzer has researched the consequences of such events for people. He concludes that fear-driven people often do exactly the wrong thing and even put themselves at risk. After the attacks on September 11, many Americans would have used their own car out of fear of flying. Result: In the following twelve months there were 1,600 more deaths from car accidents. Another year later, aircraft use returned to normal. “But we still suffer from the security measures at airports that were adopted as a result of the terrorist attacks. Flying has become much more inefficient, ”says Gigerenzer.

People try to avoid the wave of infections

There are other such examples. When the so-called swine flu frightened the world in 2009, Western governments in particular invested a lot of money in vaccinations and in a new drug that was used, among other things, to prevent serious flu events. “At that time, the British government alone spent around £ 500 million on Tamiflu,” says Gigerenzer. The German government also invested a lot of money at the time. “The money would have gone better to expand the nursing staff,” says Gigerenzer. Every year around 18,000 people would die of avoidable mistakes in German hospitals because of a chaos among nurses.

In the current coronavirus epidemic, however, inefficiencies are probably not even the biggest problem. It is much more dangerous that the fear of the epidemic and its consequences is increasingly paralyzing the economy: companies are putting their investments on hold. Consumers hedgehog. Factories stand still.

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The entrance area of ​​a residential complex in Tianjin (China) disinfects every resident upon entry

“The more the virus spreads, the more people will try to avoid the wave of infections,” says Raoul Pal from Global Macro Investor. Disneyland in Beijing, for example, is as extinct – Beijing is more than 1,100 kilometers from the worst affected city of Wuhan, where the plague started. “If the virus spreads, the first thing citizens will do is avoid the crowds,” warns the expert. “People are panicking, states are panicking, and that has consequences.” Pal can imagine that the consequences of the corona virus could bring the global economy to the brink of recession.

There are already first indications. In a row, economists have reduced their forecasts for China in recent days. Instead of growth of six percent, only an increase of five percent is expected. This has consequences for the rest of the world, especially for the export nation Germany. China is one of the most important trading partners. The giant empire contributes around 17 percent to the global gross domestic product. It is the largest producer of textiles and electronics worldwide. And at the same time the world’s pharmacy, because many important active ingredients for medicines come from China.

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The underestimated danger behind the corona virus

Germany just barely managed to avoid slipping into recession in the fourth quarter. But the measured growth plus 0.0279 percent is not much more than a breath. And already in the first quarter Germany could slide into the red due to the distortions caused by the new virus.

If this happens, economists may need to rethink and incorporate shock risks into their models. “Economists traditionally assume that people react prudently and rationally to risks. Psychologists claim the opposite. In the future, it should be a matter of equal consideration of both reason and fear, ”wrote William Schulze and Brian Wansink from Cornell University in a study of the fear reactions after shock risks. The two demonstrate how little risk and effort there is in relation to such disturbing events.

Stock markets remain unimpressed – thanks to cheap money

Once again, events such as the current wave of infections also show that the economy still has a lot of catching up to do when it comes to dealing with fear. This is exactly the conclusion that the two scientists Mario Cedrini and Marco Novarella and from Italy came to in 2015. “The importance of fear in the economy has long been underestimated,” they write in a study on the subject. This is a particular problem in the security-oriented western world, especially when it comes to correctly predicting economic developments.

The chain reactions that triggered such fears were shown earlier on the financial markets. There, fear and greed were the two drivers. However, the financial markets have now mutated into a fear-free zone. Every small drop in price is seen by investors as the ultimate buying opportunity. Even the horrors of the new corona virus have so far only briefly unsettled the stock market.

Infectious disease specialist Jelinek on the dangers of the coronavirus

Source: WELT / Carsten Hädler, Lena Mosel

Since then, stock prices have continued their record hunt. The strange decoupling from the former driver fear is mainly due to the all-round carefree policy of the major central banks. With the world still flooded with money and nothing to suggest that this could change so quickly, investors are still not worried about tomorrow.

However, the markets as a fear-free zone pose a whole new risk. Because of the carelessness, there could be speculative bubbles that burst at some point and thus damage the global economy. “It is still unclear how human behavior controls crises,” wrote the respected Princeton economist Markus Brunnermeier.

The answer to this may gain importance in the coming weeks.

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