Decision Making as Output and Bounded Rationality

  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra

China, Rationality and Pandemic Uncertainty


The emergence of coronavirus in Chinese region of Wuhan and subsequent spread elsewhere in China and abroad is sending shockwaves. The governmental response is a shutdown of cities and provinces home to millions. It could not have come at a worse time given the holidays for Chinese lunar New Year. People would be travelling back home, to their ancestral places, to be with their friends etc. The virus has put paid to the plans and tourism industry is at a standstill. Worse, the panic seems to be gripping large scale population and upheavals not ruled out. Historically Chinese Communist Party has been secretive about the incidence and spread of virus and this adds to the rumours all around. Most accounts suggest, underreporting on casualties from the Chinese authorities, some even suggesting underreporting by factor 8-10. Setting aside the exaggerations, it can be safely assumed the reporting would be around 40-50% of the total cases in the best case scenario. Given the global travel cycles, the spread of the virus overseas has a prospect to create socio-economic upheaval.  

Despite lack of clarity on the origin of the virus, many reasons are floating around the social media. At the moment, the official line seems to verve around the origin of the virus in bats or other wild animals and ensuing spread to humans through consumption of wild animal meat. In the past, SARS virus was linked to civet cat and thus the cause in all probability might be accurate.  Some accounts seem certain, perhaps with good reason, coronavirus as a product of Chinese bio-warfare gone rogue. Chinese labs for microorganisms is located in Wuhan and any leakage of a strain might be potentially significantly damaging. Therefore, the line of argument might have merit reinforced by Chinese experiments in bio-warfare. The Chinese secrecy catalyses the rumours. Increasing comparisons are being drawn to Chernobyl. The nuclear disaster is apparently viewed as primarily an outcome not just of faulty substandard design of nuclear reactor but as General Secretary Gorbachev admitted years later, an outcome of broken and distorted system that could not continue, a system that had nourished a practice of organized lying. With some merits, similar comparisons might be applied to current China as well.

Pictures and videos being uploaded on the internet and social media, many of which are disturbing, seem to convey a high handedness of authorities towards citizenry. The seriousness of the pandemic can be gauged by the fact, Chinese authorities are building large scale mobile temporary hospitals to cater to 1000 beds. Time will perhaps tell the long term impact on socio-political-economic dynamics in Chinese ecosystem but the current situation demands containment of the virus along with a design of prospective cure and vaccine. The very signal of large scale shutdown, massive building of hospital infrastructure on war-footing, military movements across cities all are sufficient signals indicating the magnitude of the disease.  Given the context, it might be worth exploring whether China has an alternative other than an involuntary shutdown.

Like any other epidemic, coronavirus follows what Gladwell might term law of few, stickiness and power of context. Given the scale of global travel, the pandemics chart a path of increasing returns to spread of epidemic. The global travellers irrespective of reason of travel, become unwitting connectors, mavens and salesman for coronavirus pandemic. Some experts argue given the contagious nature of the virus, unlike H5N1 or SARS, it does not require any specialist mavens of connector or salesman. It just spreads. The context is a given and thus add to the increasing returns and like most viruses be sticky.

In Talebian phraseology, the coronavirus is a fat tailed distribution. Implied would be alpha being less than three, thus mathematically undefined skewness and variance. The possibility of the penalties of tail occurrence would be significantly high and potentially irreversible. Therefore, borrowing from Taleb, apparently it has all signs of a ruin event. A ruin event is defined as an event whose imports are irreversible. The rapid spread of the virus across countries with increased mortality rate would put societies at high risk. In the long run, while probability of survival is finite for a single event, the probability for survival for continued exposure to repeated ruin events tends towards zero.  The framework thus makes the orthodox cost benefit analysis unviable.  

The processes do not manifest ergodicity. In other words, the historical patterns of contagion have hardly any value in determining the trajectory of the current virus. Without doubt, there is asymmetry over the process. Without exception, the novel outbreak carriers are accompanied by forward looking uncertainty. It is perhaps too early to gauge a pattern and intensity of impact and thus compounds the woes of doctors and vaccine hunters. Viral contagions necessarily need physical space to expand. There is no clarity about contagious asymptomatic carriers. Indubitably, processes like contact tracing, monitoring, temperature screening etc. might not prove to be effective. With the process being convex to uncertainty, the multiplier effect of negative returns emerge.

To experts, the reproductive ratio is higher relative to past incidences. A few are suggesting Ro, the reproductive ratio to in excess of 3.5 though some downward revision has happened in the last couple of days. Ro =3.5 implies every person infected would prospectively infect 3.5 more persons. Given around 1000 cases to begin with the reproductive ratio is likely to result in 3500 people being affected. In comparison, some estimates of World War I Spanish Flu had the reproductive ratio of less than three in community settings. Moreover the Ro is biased downwards in the early stages of the disease.  There is an added uncertainty over the mortality rate. The case fatality rate might be less than 5% but asymmetry of uncertainty might even be potentially biasing the rate downwards. The mortality rate might be visible with a lag. Moreover, there is little clarity of demographic and psychographics of those who are likely to succumb to the disease.

Apparently, given the uncertainties and the associated concomitants, as Taleb suggests, the rational policy for China and by extension of the rest of the world would be to put in place a complete cessation in mobility, local and global. The short term impact might be severe on the economy and society, yet without over-abundant precaution, short term ramifications might lead to irreversible repercussions. Prima facie, Chinese action seems to border on paranoia, supressing information which all might haunt it later but the current state of affairs leaves it with no option but force a total shutdown.









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