There is risk and there is
uncertainty. Risk is about factoring a possible positive or adverse occurrence
that changes the payoff and in addition there exists a positive probability of
the occurrence of the event. Uncertainty is unknown risk. There would be no way
of knowing an event happening and its consequent impact either discrete or
continuous. Supply chain disruptions due to global wide pandemic with epicentre
in the production hub might have a very low positive probability, yet the risk
levels would be so low that they would not be factored in. Moreover, the
multiplicative nature of the event creates an uncertainty which cannot be
factored in. A question like will Olympics happen on schedule is simply not
answerable given there is zero clarity on the future directions of the
pandemic.
The directions of the multiplicative
uncertain events often depend on individual motivations and risk assessments
and their conflicting nature with the societal assessment and coping with the
prospective ruin events. The post “Economics
of Segregation” discussed the aggregate outcome as a product of independent
exercise of individual preferences and in quite many ways would turn out very
different from what an individual has set out to do. These apply in the context of pandemics too.
To an individual, faced with the
pandemic, the decision to be either conservative or demonstrate panic or remain
indifferent is contingent on the risks he faces as an individual. Each
individual is different and measures risks as applicable to them. Therefore
their choices would be determined by cost benefit analysis of their individual
payoffs or at best the payoffs to their immediate or extended family. To an
individual who is otherwise healthy, the probability of the pandemic affecting
him or her in a significant way is low and thus has all the motivations to play
an indifferent or safe strategy and thus not take any action that might
resemble a panicky situation. To an individual, who has perhaps higher risks
from other ailments too, might not sufficiently demonstrate any measures to
tackle the risk of the pandemic given the low probability of occurrence to the
said individual or his/her immediate or extended family. Therefore a rational
action per se might be playing down the dangers of the pandemic. This however
holds well under ceteris paribus.
At the same time, the societal
payoffs are different. To a society, a rational response would be to
demonstrate an exaggerated response to take sufficient preventive measures to
stop the spread or at least flatten the curve. The societal payoffs are
contingent on the low spread or in the best case complete elimination of the
pandemic. To an individual with low risk of contraction of the same, the
immediate payoffs might not warrant the same. Yet, in demonstrating the
supposed rational action of playing down the pandemic, the individual is
behaving irrationally.
As the pandemic spreads, being
inevitable if every individual plays down, the risk of contracting the pandemic
increases with marginal patient. Therefore, to an individual, the payoffs
change at every stage or for a marginal patient. In the infantile stage, there
apparently is a conflict between individual payoffs and societal payoffs thus a
differentials in grading of their choices. The conflicting choices create their
own version of tragedy of commons. In the context of commons, it is the
destruction of resources that leaves everyone worse off in the end at the altar
of an individual pursuit to make himself or herself better off. Similarly, the
seemingly rational innocuous choices catering to immediate payoff of an
individual while antagonistic to societal needs might result in a similar
tragedy where every individual ends worse off, the cost extending to loss of
his or her life at worst or even in the best scenario some damage to health and
thus productivity.
There exist an idiosyncratic risk
inherent in each individual. The risk entails a short term low probability of
being impacted by the disease thus entailing an exercise of certain choice.
However, this short term risk is subject to trade off with long term risk and
payoffs. As the pandemic spreads, the probability of contracting increases. In
the long run, there is a movement towards convergence of idiosyncratic risk at
individual level with the systemic risk at the societal level. In a context
wherein an individual is spared of the worst excesses of the pandemic, there is
a demonstration of what economists would term “income and substitution effect”.
The costs of routine treatment or even alternate emergency becomes costlier
relative to availability of resources to cater to the new pandemic. The
individual interests become subordinate to societal interests in reference to
provision of health care services.
Moreover, the uncertainties might result in numerous unintended spill
overs mostly unpleasant that might override the individual short term idiosyncratic
risk. Yet to many, the inability to compare the inter-temporal choices and the
cognitive constraints in understanding and deciphering the inconsistency and differentials in payoffs would push
towards these actions.
In many ways, a solution to these
dilemmas and trade-offs lie in the learning curve. When elders in the towns and
villages would have lived long enough to see the tragic consequences of past
epidemics, there would be coaxing or persuasion to adopt a different approach,
perhaps panicky, perhaps over exaggerated. For instance, many elders would have
observed the effects of contagion of small pox or plague or cholera etc. on the
lives of the villages and towns. They through their wisdom would have gauged
the possible side effects of ignoring precautions. So in many towns or villages
some fifty odd years ago, whenever a team would come to vaccinate or inoculate
for epidemics like small pox, plague, cholera among others, nobody in the
village would seek to avoid it. On the contrary, they would seek to be the
first to get vaccinated or inoculated. The availability heuristic manifested by
the experiences narrated by the elders amplified the response. The result thus
was the societal payoffs override the individual short term payoffs thus
increasing societal welfare.
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