Behavior Economics in the Covid Era

By Finn Walker '21

If everyone were a rational actor, the Covid-19 pandemic would present far fewer challenges than it has, and life might have returned to normal by now. A neoclassical economist running a cost-benefit analysis on going out to eat would quickly arrive at the conclusion that a nice meal is not worth the irreducible risk of dying from a deadly virus, however low the risk is perceived to be. Unfortunately, humans don’t always act rationally. In reality, we hardly ever do, and that’s where behavioral economics becomes useful.

Behavioral economics uses a confluence of psychology, cognitive neurology, and sociology to predict and influence behavior, often referred to as a “nudge.” It analyzes biases and heuristics, mental shortcuts for decision making, and utilizes that information to create environments where individuals act in their long term interest.

A common factor that makes people act against rationality is the Present Bias, or the tendency for humans to sacrifice long term benefits for short term gains. Payday loans, for example, exist solely because of present bias, as no rational actor would accept a 450% interest rate. As it relates to Covid, individuals are more likely to overvalue the short term benefits of going out to dinner or to a party, and disregard the potential long term consequence of getting sick or getting someone else sick. This can be counteracted by emphasizing the immediate consequences of breaking social distancing rules, such as fines or potential ostracism.

Another heuristic that causes irrational decision-making is the Framing Effect. This is the cognitive bias experienced depending on the way in which information is presented. For example, people are going to change their behavior depending on whether they were told coronavirus patients have a 98% survival rate or a 2% mortality rate, even though both statistics provide the same information. Studies show that gain-framed messages are better at encouraging people to do preventative measures, such as hand washing, social distancing, and wearing masks. When the goal is to encourage frequent testing, loss framed messages detailing risk and consequence more effectively induce the desired behavior.

Behavioral economics also analyzes how humans interact with one another. Research shows that humans prefer to act similarly to those around them, commonly referred to as herding behavior. A similar concept, Social Proof Theory, argues that an individual's behavior changes based on the desire to avoid judgment from an external observer. Therefore, scientists hypothesize the spread of Covid can be reduced by telling individuals that most individuals around them are socially distancing, and not doing so will let down your community and result in societal judgment.

Behavioral economics has created a new field of economic study, several Nobel laureates, billions of dollars in wealth, and potentially, new solutions to the pandemic. Minor changes like presenting the short-term consequences of Covid-19, changing the framing of information based on its intent, and structuring disease prevention as a community effort and responsibility can significantly reduce the spread of coronavirus, and hopefully get us a step closer to normality.

Mooslem Soofi, Farid Najafi, Behzad Karami-Matin. “Using Insights from Behavioral Economics to Mitigate the Spread of COVID-19” https://link.springer.com/article/10.1007/s40258-020-00595-4

Pritika Rao. “Behavioral Economics in the Time of Coronavirus: Rebellion or ‘Willful Ignorance’ in the Face of ‘Grand Challenges’”

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7250586/

Stockholm School of Economics. “Nudging out the Coronacirus with Behavioral Economics”

https://phys.org/news/2020-06-nudging-coronavirus-behavioral-economics.html