Founder Editor in Chief: Octavian-Dragomir Jora ISSN (print) 2537 - 2610
ISSN (online) 2558 - 8206
Contact Editorial Team RAFPEC The Idea
Mutating Mindsets and Contagious Behaviours (Part I): An Overview of the Coronavirus Outbreak and Its Insights for Economic Theory

Mutating Mindsets and Contagious Behaviours (Part I): An Overview of the Coronavirus Outbreak and Its Insights for Economic Theory

Note: This is part of a larger article dealing with the effects of the coronavirus outbreak. This part provides an introduction on the current states of affairs and sets the groundwork for a comparison between neoclassical economics and behavioural economics in order to analyse the ongoing situation.

The next part will pick up where this one leaves off, and will be centred on an analysis of economic behaviour by comparing the tenets of neoclassical economics with those of behavioural economics.

Finally, the third part will deal with the geopolitical and geoeconomic consequences of the outbreak.


It is no longer a secret that the new coronavirus outbreak is the most significant issue troubling mankind at the moment, generating a level of panic and uncertainty with powerful effects on all level of society, politics and the economy. What began as a biological curiosity in the city of Wuhan in China soon spread throughout the rest of the world through the travels of infected individuals and the virus’ extremely contagious nature. By the time its characteristics and potential lethality became more obvious to authorities, the virus (“baptized” SARS-CoV-2, the “author” of the COVID-19 disease) had already spread outside of China and the Asian continent. The disease it causes is not yet fully understood and how it came to be is still unclear, though scholars tend to agree that the virus was initially confined to a few species of animals before making the jump to humans in China. 

The scuttlebutt 

A lack of knowledge about the virus led to continuing debate regarding its severity; as a result, many failed to protect themselves against its spread. According to Worldometer, by 4 April 2020, nearly 1,200,000 people globally have been infected with the virus, with over 61,000 deaths and about 242,000 recoveries. While China has reported a mitigation of the crisis after nearly four harrowing months of struggling to contain it, the United States were struck the hardest with over 277,600 cases and 7,400 deaths, followed by Spain and Italy. Hard measures have been taken by governments in the affected countries, ranging from the restriction of the right to free movement to closing down businesses and limiting interpersonal contact. Furthermore, as the disease became more and more prevalent, authorities from several states have currently pressed criminal charges and issued fines against individuals who endangered others by violating quarantine. This has generated all sorts of reactions from the populace, with some individuals showing a blatant disregard for the advice of healthcare professionals while others embarked on a frantic race to stock up on the necessary goods to ease isolation.

Of course, this has generated a reaction from the markets on all levels as well. This led, for instance, to a stock market crash in the early months of 2020, with major stock market indices – the Dow Jones Industrial Average, Nikkei and FTSE – taking powerful hits which sparked comparisons to those witnessed during the global financial crisis in 2008. Tourism, manufacturing, sports and entertainment are other major economic sectors which have suffered freezes in the wake of the outbreak, as national government banned flights to and from high-risk areas and implemented measures to drastically restrict movement within and between communities, group activities and gatherings, all in an attempt to contain the virus until a vaccine is found. To give an example of the magnitude of the economic impact of this situation, China reported a decrease in its industrial output by 13.5% in the first two months; unemployment skyrocketed to 6.2%, retail sales went down by 20.5% and fixed asset investments decreased by 24.5%. Another significant impact was noted in the international oil prices – as a result of economic activity slowing down, demand for oil has also decreased. Thus, the Organisation of Petroleum Exporting Countries (OPEC) resorted to curbing oil production in the hopes of supporting falling oil prices. Despite Russia and the OPEC having collaborated in light of US shale oil boom threatening price sustainability, Russia rejected this decision, leading to oil prices further plummeting.

All across the board, there is no shortage of analysts warning of an impending economic recession caused by the coronavirus outbreak, with international trade facing increasing uncertainty. A report issued by the United Nations Conference for Trade and Development (UNCTAD) assessed that China’s economic woes are bound to generate a series of negative reactions in the value chains of European, American and East Asian economies that rely on their Chinese partners to provide key inputs. This is further confirmed by the Financial Times, according to which ports have registered a sharp decline in overseas trade with China. By any estimate, it is not an exaggeration to state that a disruption in China’s ability to ship its goods to its partners will have an effect on trade both between countries as well as within individual countries. 

Self-fulfilling prophecies? 

There is, on the other hand, a strong trend in various countries as citizens flock to supermarkets to stockpile on basic goods as well as medication in several parts of the world. Meanwhile, businesses are being shut down and employees either are laid off or get their wages cuts, and movement restrictions make it increasingly more difficult for people to actually buy their products from the shelf. This puts immense stress on suppliers to meet the increased demand, while the United Nations and the World Food Programme Insight are already warning us of a looming food shortage as governments face domestic pressure to instate protectionist policies, which would have the side effect of limiting competition and allowing local producers to raise the price. From a macroeconomic perspective, the spread of the coronavirus is feared to cause a decrease in productivity growth which would dampen demand, resulting in increasing unemployment, setting up a vicious downward spiral. In the US, jobless claims have reached record-setting levels, while in Norway, the unemployment rate increased fourfold in a span of two weeks, up to a record 10.4%. Although Reuters specifies that decreases in aggregate demand would eventually compensate for the short-term rise in prices, an analysis by VoxEu points out that, absent any intervention in the monetary policy, this would only lead to a negative loop between plummeting aggregate demand and plummeting investment as companies lack the incentive to produce more, thereby resulting in even greater unemployment.

90 to 95 percent of all cases of COVID-19 present rather mild symptoms that tend to go away in a fortnight, but about 5%, varying greatly with locality, are lethal – mostly among the elderly with comorbidities. Nevertheless, it has caused a worldwide panic with far-reaching effects on the economy, politics and society as a whole. It is indeed a phenomenon that most people alive today have never been confronted with. Its economic effects are worth studying and analysing, but it is also interesting as a case study for comparing two rather contrasting economic paradigms: the well-known neoclassical economics that has dominated the field over the past few decades and behavioural economics that has been gaining ground for some years. 

Economic battles 

When we look at human economic behaviour through the lenses of the two paradigms, we see quite differing pictures. According to the tenets of neoclassical economics, human behaviour is driven by the following principles:

  • Rationality in a specific sense of the word – i.e., the notion that people and companies will always choose the options that best suits their own interests; in other words, people are optimisers;
  • Stable, fixed preferences – i.e., people have clearly set priorities when it comes to choosing given goods or services, and they are sorted hierarchically from the most preferable to the least preferable, and this order does not change over time;
  • Access to full information – i.e., about the factors that influence the market, and people are thus able to independently make decisions.

The aggregation of the behaviours of all the individuals and firms operating in a given economy is what drives markets and the equilibrium, according to this view.

Although it is the most prominent economic paradigm, neoclassical economics has come under heavy fire over the last couple of decades, and it received particularly harsh backlash in the aftermath of the global financial crisis of 2008, which many critics pointed out it failed to predict, an aspect that in turn spurred interest in other schools of thought, especially the so-called “heterodox” ones (the Austrian school, behavioural economics etc.). Specifically, it was the unrealistic nature of its assumptions about human behaviour that its critics felt was the most pungent flaw. Replies to this criticism typically state either that the assumptions, while not necessarily true at the individual level, describe aggregate behaviour rather well, or that “although all models are wrong, some models are useful”, i.e., models based on these assumptions incorporate these assumptions for the sake of simplicity and, despite their inaccurate depiction of human behaviour, can actually yield useful predictions or insights.

Nevertheless, the former counter-argument holds no water since neoclassical economics is at its core a study of individuals behaving in certain ways. Thus, if the analysis is wrong for a sufficient number of individuals, it would result in a wrong conclusion for the aggregation of the expected decisions of said individuals, since the decisions of each actor of the economy are the input for the aggregated overview – if the input is inappropriate, the output will be poor. Indeed, a foray by the Business Insider shows that economic forecasting has a rather dismal track record when it comes to the accuracy of its forecasts, and an IMF analyst estimated that economic forecasts failed to foresee 148 out of 150 crises. As for the latter criticism, the usefulness of the insights that models produce would ironically be undercut by the very fact that the larger theory they are integrated into is founded on a flawed basis to begin with. 

The basis of philosophy 

When it comes down to it, every one of the assumptions listed above is questionable even on the most basic grounds. Take rationality, for instance, which is usually its most hotly disputed assumption. While most people tend to associate rationality with logical reasoning, in economics rationality simply refers to individuals’ drive to satisfy their own interests – whatever that interest might be, whatever the reward may be, the individual would only make those decisions that he estimates would bring them the benefit they desire, whether that benefit be a sum of money, a certain good, an immaterial asset, reputation, a happy afterlife etc. To be fair, this assumption is actually perfectly defensible from a logical point of view. Indeed, even the most commonplace observations would reveal that any action an individual performs is meant to advance their own interest, even if only because of human nature itself.

Even altruistic gestures and any kind of prosocial behaviour can be described as being selfish and rational from an economic standpoint; for instance, in evolutionary terms, altruism can be argued to strengthen bonds among the members of a group, thus encouraging them to cooperate which then increases their individual and collective chances of survival and prosperity, and this tendency then trickles down throughout countless generations through genetic inheritance. From a neuro-anatomical point of view, prosocial behaviour is known to release certain pleasurable hormones in the brain such as serotonin or dopamine, which serve to strengthen that behaviour in the future and wire the brain to seek further opportunities to engage in such actions. From a religious outlook, prosocial behaviour is known to be the key to a blissful afterlife in most mainstream traditions. Thus, any action is rational, for as long as an individual engages in it with the expectation that the marginal utility – the reward associated with said action – is greater than its marginal cost, i.e., the effort it consumes. Briefly put, this assumption is easily the most defensible of the three as virtually any behaviour can be described as economically rational.

Unfortunately, while true in an abstract, philosophical sense, it is precisely for this reason that it is operationally useless – as the saying goes, that which can describe everything describes nothing. Though the notion that people would always seek to act in their own interest is as good an assumption as any, it is plagued by two main problems.

(i) The first of these issues is a theoretical one: if, by the principle of rationality as described earlier, any behaviour can be construed as rational, both ante factum and in hindsight, then this principle adds no value in economic analysis, theory enrichment or forecasting whatsoever as long as the driving criterion is an actor’s ex ante assessment of the usefulness of an action at the moment of their decision. Since the starting point is that, if someone chooses to pursue a course of action, then they must have deemed it to be in their best interests, there would be no way to determine whether a behaviour would be rational or not – any and all behaviours, actions and decisions would be rational, and that would be the end of it. Therefore, it is no more or less reasonable to assume that economic agents in an economy would donate half of all their earnings to charity as it would be to assume that they all would save the money in bank accounts or spend it solely for their own material gain – if we can imagine why the benefit of that decision would be superior to all other decisions, then it is just as reasonable.

It would be like saying that an action is morally good if the person doing it feels justified in carrying it out at the moment he commits to it – virtually every action would be morally good since at the time someone decides to do something, they feel it is justified, regardless of any regrets that might come along later on. A person who opts to donate their entire fortune to a total stranger and live as a hermit on meagre means is just as rational economically speaking as one who chooses to invest half their fortune in promising ventures and save the other half. Here we can invoke the notion of falsifiability: the property of a statement to be false in certain defined circumstances. It is essential as it gives ideas and theories an identity (e.g., when determining whether a defendant was in possession in their mental faculties at the time they committed a crime: it is important to know what it means for a person to be accountable and unaccountable for their actions in establishing their guilt, what is normal, reasonable and responsible behaviour and what is not). Assuming any action could somehow be interpreted as reflecting conscious, wilful behaviour, then no person would ever be considered unaccountable and thus anyone could be convicted. The problem with the assumption of rationality is that it lacks falsifiability and therefore not very helpful in practice.

(ii) The second issue with the principle of rationality of economic agents lies in the way it is actually applied in building models, carrying out analyses and forecasting. On the one hand, rationality does not necessarily concern itself with why economic agents want what they want, nor does it imply that what they want is actually sensible, its main goal being to predict certain outcomes. On the other hand, it is virtually impossible to predict outcomes unless the analyst makes assumptions what it is that an economic agent would seek to obtain in order to assess their choices and how these interactions between each agent’s choices would produce an outcome. Thus, when the analyst begins to formulate assumptions about how agents would act, it is all too easy to give in to the temptation of applying rationality in the everyday meaning of the word, synonymous with reasonable and logical. Goals are subjective and specific to each economic agent; as there are large numbers of agents in an economy, any attempts at investigating their behaviour becomes futile since it is practically impossible to account for all possible individual variations, which is a reasonable concession we can make. This also does not contradict the assertion that the agents would ultimately act in self-interest. 

Added complexity 

However, in an attempt to simplify the inherent complexity of people’s subjective judgments and confer a measure of predictability to their behaviour, two additional assumptions are made. The first is that self-interest is often taken to be primarily monetary or material in nature. The second is that, when engaging in economic behaviour, individuals somehow become clear-headed, unclouded by biases or limitations, focusing on that which is objective and measurable, capable of thinking through all possible scenarios, calculating their respective benefits and costs with regards to their needs and, depending on the context, other agents’ choices, and finally picking out the best one.

These additional assumptions have the merit of conferring greater falsifiability to the principle of rationality. However, although not improbable, they can hardly describe the general behaviour of individuals in light of what we know about human cognition from neurosciences with all the biases and nuances that tilt people’s thinking away from what one would consider rational, how people relate to one another from developments in sociology, the sheer load of information to deal with in this day and age and the physical confines of time as it is filled with various tasks that need to be addressed, leaving people with insufficient resources to tackle economic issues with the clear-headedness and rationality that models often assume. These assumptions can at best describe only a fraction of the population and at worst a caricature of human behaviour. In the words of Richard Thaler – winner of the 2017 Nobel Memorial Prize in Economics for his work in behavioural economics – the resulting agent, known as homo oeconomicus, is one who “can think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the willpower of Mahatma Gandhi”.

Furthermore, the assumption of clear, stable, ordered preferences is also attackable from multiple avenues. For example, the very notion of preferences being stable, their order unchanging across one’s lifetime is, at best, only partially correct since people’s priorities do change throughout their lives, especially upon undergoing certain events: a person’s priorities would change in as short a timeframe as from their senior year in high school to their freshman year in college; then, that same person’s priorities would again be rearranged once they graduate college and get a job, then again once they start a family and so on. Retirement is not a high priority for most college students, but it becomes an important topic once they reach late adulthood; some preference changes stem purely from biological, hormonal changes. These, of course, are not isolated events, but very normal phases in any person’s life. Perhaps one of the most evident examples of the changeability of preferences is fashion: fads become popular for a certain period of time, during which several sizable segments of the population gives a high preference to that fad before gradually leaving it behind. Moreover, preferences cannot be clear in the absence of complete information – for example, how can one know whether they prefer one brand of cigarettes to another before they even begin smoking? Can a gamer know whether they prefer a traditional gaming setup as opposed to virtual reality-enhanced gaming rig before they had the opportunity to try them both out? Sure, the gamer can make an assessment by reading the specifications and watching video examples and then make a decision, yet they still lack knowledge of the experience of gaming – which is a relevant factor in making a valid comparison between two options.

This reminds us of philosopher Frank Jackson’s “Mary’s room” thought experiment, whereby a scientist called Mary is locked in a black and white room, in which she learns all there is to know about human vision and perception of colour – the argument is that, before Mary is released from the room so that she may actually see those colours and experiencing them for herself beyond their descriptions as physical manifestations of certain wavelengths of light, she lacks full knowledge of what it is to actually see red, blue or green and what it is like to experience redness, blueness or greenness. The argument was meant to contribute to the debate on the nature of consciousness by showing that there are certain realities of subjective experience that cannot be accounted for purely in terms of physical characteristics (and thus, consciousness cannot be ontologically accounted for by physicalism). In the context of economic theory, we can appeal to this same argument as an example of how perfect and irrelevant information before making an economic decision is hard enough to attain that making a fundamental assumption out of it when analysing the decisions of economic agents is in itself a leap of faith, as they need to assess their choices on less information.

This brings us to the last assumption – that of complete information about prices, competition, other actors etc. This is, in my view, the weakest of the three core principles, for even in the context of all relevant information being available to an actor, it may well result in them still lacking information either because they lack the prerequisite knowledge to properly integrate the information into their decision (e.g., when choosing between different brands of laptops, the consumer may not understand all the technical terms and their implications) or because they do not have the time to go over the entirety of the information related to a product, especially if they estimate that the time spent doing that research would result in a negligible gain in terms of decision quality. Information overload is very characteristic of our digital age, as is divided attention and thus impaired decision-making. Plus, even if we were to assume that, for instance, people did have extensive knowledge of all relevant information regarding the economic environment they are operating in, the very awareness of that information may well cause unexpected changes or self-fulfilling prophecies. For example, if a meteorologist publicly announces that, by all estimates, it will rain tomorrow, the announcement will have absolutely no bearing on whether it would rain or not. However, if a reputed economist were to announce that food prices will surely increase over the next few months, this will encourage people to stockpile on foodstuffs to avoid having to buy them at a higher price. Yet, this would actually generate a real increase in prices, whereas such might not have necessarily been the case had people not had reason to believe that they would increase, i.e., had the announcement nod been made. This is an example of a self-fulfilling prophecy. 

In the next part, we will give an overview of behavioural economics and its key concepts; then, we will overlay the theoretical frameworks of the two paradigms to highlight the different outlooks they yield on economic decision-making in the current context.




The Romanian-American Foundation for the Promotion of Education and Culture (RAFPEC)
Amfiteatru Economic

OEconomica No. 1, 2016