Risk And Our Consumption Choices
Finweek English|26 November 2020
A new study on pandemic buying yields interesting results.
Johan Fourie

By the end of October, South Africa’s Covid-19 case fatality rate – confirmed deaths divided by the number of confirmed cases – was 2.7%. This rate, of course, masks large differences by age. Globally, the case fatality rate of those younger than 10 is 0%; for those above 80, it is above 10%. Put differently: compared to someone in their 20s, babies are 9 times less likely to die; a 75- to 84-year old is, however, 8 times more likely to end up in hospital and 220 times more likely to die.

These large differences in mortality risk allow economists to investigate a central question to discipline: to what extent does risk affect our behaviour? The homo economicus of first-year textbooks, in which consumers rationally maximise utility, has over the last three decades come under attack (and often ridicule) for the naïve way it interprets human behaviour. Behavioural economists have pointed to the many biases and prejudices that afflict humans, questioning our ability to behave in a way that accords with our rational self-interest.

Making such rational decisions is especially difficult in lowprobability settings, like natural disasters or terrorism. But given that rare events are by construction, well, rare, how do we study their effect on consumer behaviour systematically?

A team of economists has found a way to do so with Covid-19. They argue that although Covid-19 is a rare event for everyone, it affects some more than others. Because of the large variation in the widely publicised mortality risks, if we were indeed rational utility maximising agents, we should expect older individuals to behave very differently to younger individuals. This should be especially true during the peak of infection – compared, for example, to just before the pandemic.

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