Economic Recovery and the Scepter of Cognitive Dissonance

No rational thought will be wasted when the payoffs are well grounded, participants know exactly what to gain and what to lose when they take a position; consequences can be estimated with a reasonable degree of accuracy.

When data is non-linear and several inputs are not well known that give rise to an output, rational thinking will be clouded. There could be far higher incentives for downplaying losses than gains and our biases could be swayed towards loss aversion to economic outputs than on gains to be derived on taking risks, on life included.

Steven Pinker in his very recent Harvard lecture on Covid-19 Rationality had brought this argument why even with low actual death rate from the virus in a population (including Death among the infected & Death among Tested positive), we have a range of responses that could be short on rationality.

But the long lecture could be cut short with this simple argument that rationality fails to act when we try to equate economic loss with a wide range of possibilities to the loss of human lives and we try to take yardsticks to judge the former (regardless of its impact on the latter) while both could be inter-connected if actions for reducing loss in income could be counter-productive to reducing loss of human lives and vice versa.

Rationality here could be clouded by immediacy of concerns and this is no simple matter. If R0, or the number of people infected by a single individual who has been infected with the virus is greater than 1, we have an issue at hand that we could be moving into an exponential territory, which we are not all feel at ease to go with.

Apart from population growth or compounded interest rates, which are closer examples of exponential growth, all other examples are related to a loss function (harmful and therefore abhorred); take bacterial growth, cancer cells, radio-active decay, weed growth, spread of fire, etc these are the most common examples that come to our mind when we talk of exponential growth and therefore as humans we are far more allergic to exponential functions. It is more symptomatic of harm.

Also we do not understand this well, it takes only one day for a weed to fill up the entire pond from a half filled pond, if its rate of growth is by a factor of two per day.

Therefore any spread with the rate of more than 1 makes us very cautious and we try to find all solutions to check the spread to far less than one till we allow normal life to return.

But this is where cognitive dissonance sets in; simply put it is the conflicting attitude or behavior when confronted with a situation where rationality is put to test.

 If there are far higher incentives to down play a loss then we would not hesitate to go for it, but that gain could well be short lived such are the woes of our current times.

Take the experiment of cognitive dissonance where a group of people are told to turn pegs on a peg board for half an hour and then some are given $1 for doing it and some $20. The group who got the $1 when asked how tedious their job was would lie easily and say it was fun, whereas those who got $20 would tend to say otherwise; the incentive of $20 would be high for them not to lie.

The incentives for saving the economy are way too highly stacked against the loss of human lives and this is where the cognitive dissonance takes over.

The risks of such a dissonance is however very high both for the economy as well for the individual lives who are part of the spreading virus that is yet to be contained.

The solution is not simple as the cost of stopping the spread is also way too high, it would need 100% commitment for every individual in the country to be part of a rigor that would cost them for at least 60 days to choose a life that they would never have imagined ever; to forsake everything and be living like a monk can never be easily accepted.

This has serious ramifications for other participants in the economy as well. If more than 50% of participants are on daily wage, this must be cared for, this is like cash in hand before you start to embark on the fight against the virus. Not a single economy barring one could think of attempting this.

The economic loss that would ensue would be catastrophic and that is precisely the reason why cognitive dissonance disallows to act. In fact the reverse rationality sets in that tries to underplay the seriousness of the loss stemming from the virus with a barrage of data stating that the mortality rate could be put under check even with the new conditions that are brought in which are different from the lockdown conditions.

If you are an early starter you will do well to stop the spread, but if the lockdown is not handled with an iron fist, the moment you open up, you lose the advantage and the rising catastrophe of the economic loss would prevent you to do anything further.

The curve of tightening cannot follow a data that is shrouded in various types of non-linear inputs, tightening process should be the driver of results not a follower.

The risks of this general rationale that is clouded by cognitive dissonance is mounting. Some countries like India with primary healthcare infrastructure yet to be fully developed, it is all the more important to raise the flag when taking a position on life versus livelihood.

But everything about cognitive dissonance is not net negative, it inspires to think out of the box towards solutions that never existed in the past. It suddenly sparks off new thoughts that did not exist in the first place, powered by incentives.

Cognitive dissonance abounds in major sectors of business as well, the best example is when you see long term strategic thinking in large corporations now suddenly being confronted with a situation where even the very short term (a week for example) is completely clouded in terms of forecasting.

Here is the best example of a very highly strategically oriented corporation with long range plans, so much in evidence, now must struggle to find its bearings in a reasonably long period of uncertainty that it never grappled with in the past.

Cognitive dissonance sets in to ignore a given result when the incentives are so tilted, but that is what drives behavior to unchartered territories.

For economic recoveries to be on a path that could be made more predictable, we must have a mix of actions that are risky but predictable and we must have backup plans, several of them to succeed.

Between a set of actions that are all risky, especially where lives are at stake, to choose the less risky is where we see cognitive dissonance. If there is a 50% chance of saving an economy by a set of actions that would also run the risk of 20% rise in current death rate, we will tend to choose paths that would have may be less chance of loss of lives than in choosing a path that would raise the chances of an economic recovery.

Choosing a sector to open versus another, what are the tradeoffs? Is there a way that buffers can be so generated that even if the virus attacks a sizeable number after opening up, the health system is better prepared to save lives? Simultaneously working on two objective functions is where rationality falters with incentives of several kinds.

The incentive to save a life is something we carry in our value systems, the incentives for livelihood is very different to one and the other.