Is an Economic Panic Manageable?

John Maynard Keynes stressed the importance of the state of confidence for the economy. Today we should be talking about managing the state of panic. Is it possible?

The current crisis is the result of the superimposition of three major crises: a fall in supply as a consequence of the breakdown in the global production chain, a collapse in demand because of the closure of businesses and part-time unemployment, and finally a vulnerability of infrastructure, especially the health system.

Thierry Breton, European Commissioner for the Internal Market, expects a loss of 2.5% of GDP in Europe for 2020. Some forecasters even believe that a 5% drop is in the cards. If the crisis lasts beyond spring, if borders remain closed and people are quarantined, we risk a depression. It could lead to panic.

Panic is defined as the result of a sudden and unreasoned terror, often collective. At the heart of panic is fear. It begins when a region of the brain called the amygdala sends a distress signal to the hypothalamus. It then triggers a surge in adrenaline that leads to an age-old reaction: fight or flight. Afterwards, the body produces hormones like cortisol that will increase our energy levels in the long run.

In economics, panic leads to all sorts of impulsive and often senseless actions such as selling at a considerable loss when the stock market crashes or rushing to buy pasta in supermarkets. Fundamentally, there is a fear of losing something, food, a service, an income, a job or an asset.

The concept of information asymmetry exacerbates this feeling. In times of crisis, consumers believe that others have privileged information that is unknown to the general public. They copy the behavior of others so that they don't miss anything. It leads to panic in the stock market or fear of a shortage in food or medical supplies.

The other reaction is the overestimation of low probabilities. Switzerland has one of the highest percentages of Covid-19 contamination in the world: more than 1000 cases per million inhabitants (at the time of writing) or 0.1% of the population. Yet intuitively, most people will estimate this figure as being much higher and panic.

The countries that have best contained the Covid-19 panic are Singapore (0 deaths), Taiwan (1 death) and Hong Kong (4 deaths). They benefited from the experience of the SARS crisis in 2003. Their strategy was to act quickly and powerfully, for example, with massive testing campaigns.

The small Italian town of Vò near Venice implemented a similar approach. It immediately tested its 3300 inhabitants, even those without symptoms. 3% of the population was infected. It isolated those who were vulnerable and then started again ten days later: 0.3% infected. Today, they have contained the epidemic.

Then, it is necessary to communicate clearly and simply: no need for pompous Churchillian or Gaullian speeches on the war against the virus. It destabilizes everyone. In Singapore, on the contrary, Prime Minister Lee Hsien Loong spoke directly and calmly to the population as early as February 7. The supermarkets that were stormed the day before returned to normal the next day.

Sometimes the best strategy is to do nothing, but it is counter intuitive. Kenneth Hill of Saint Mary's University in Canada has studied how people panic when they are lost in the forest. The best chance of being found is to stay put. Likewise, in the stock market, sometimes the best strategy is to wait for the storm to pass. Easier said than done.

For companies, it's different. Leaders must maintain a high level of energy. The best thing is to project the company in the future. What's going to happen when business picks up again? Planning activities have the great advantage of creating common goals at a time when panic dissolves social and entrepreneurial bonds.

Because sooner or later, life and the economy will recover. The danger is to be unprepared when everyone returns to business. At that moment, agendas risk to be already full. Companies will all probably want to get into the market at the same time. Not everyone will succeed in coping with a short but major surge in demand.

In the meantime, we must remain calm and ignore the prophets of doom. Victor Hugo said: "In this moment of panic, I am only afraid of those who are afraid." 

Lees het originele artikel van Stephane Garelli via LinkedIn hier.


Stephane Garelli op dinsdag 9 januari 2018 op het FSIN Brunchcongres

Stephane Garelli
Stephane Garelli is hoogleraar aan het IMD (Instituut voor Management Development) in Lausanne. Hij was tot voor kort ook directeur van het World Economic Forum, het befaamde jaarlijkse congres in Davos. Zijn collega’s erkennen dat er niemand ter wereld is die de hedendaagse mondiale economische situatie beter weet te duiden dan Garelli. Hij is schrijver van veel baanbrekende boeken. Een van zijn spraakmakende recente boeken heeft als titel: "Are You a Tiger, a Cat or a Dinosaur?"
 

Een terugblik van het FSIN Brunchcongres 2018 met Andre Ten Wolde, Michel Schaeffer en Stephane Garelli:

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