a. Global Health Issues
b. Economic Impact
a. Emotional Biases
i. Risk Aversion
ii. Regret Aversion
a. Every market in today’s economy was impacted either directly or indirectly by the SARS epidemic.
i. Most saw measurable decreases in GDP
b. Global cost of lost economic activity due to SARS was approximately $54 billion
a. Economic damage caused by SARS can be attributed to the behavioral finance emotional biases of loss aversion and regret aversion affecting investors globally.
Global Health Issues, Behavioral Finance and the Markets:
The Role of Behavioral Finance in how ...view middle of the document...
As a result, every market in today’s economy was impacted either directly or indirectly by the SARS epidemic. Media coverage spread the news of the outbreaks rapidly and influenced public opinion on a global scale overnight. This is where behavioral finance comes into play. Fear set in amongst workers, investors, and consumers. Tourism declined and investor investment outflows ran rampant.
Behavioral finance attempts to understand and explain how people, collectively and individually, make financial decisions. It provides tools for analysis on a micro and macro level, incorporates investor wants, emotional and cognitive biases, and market anomalies to understand and possibly predict market and investor behavior. Of the biases, emotional biases are the most difficult to reconcile because they are impulse in nature and deeply rooted in the human psyche.
When workers watch the news and learn of a growing pandemic or potentially global health issue they instantly become fearful of traveling, attending social events, and even working if they are forced to be in close contact with those who ‘they view’ as possibly infected. As a result productivity declines, airlines have fewer passengers, and hotels have fewer guest. The economy experiences a decline as investors scale back their investments to compensate for decreased demand and increased risk. Essentially, this is a form of loss aversion bias. Irrationally, investors are fearful and place a greater emphasis on avoiding losses than gaining profits from remaining at peak efficiency and taking advantage of their competitors’ fears and loss aversion bias. This irrationality is further compounded when those investors begin to exhibit apprehension to reenter the affected market after the pandemic is contained, exhibiting the emotional bias of regret aversion. The investors regret for the action they take is greater than the regret for the one they fail to take. They avoid taking decisive action and capitalizing on the lack of competition because they fear that in hindsight, whatever course they select will prove suboptimal.
In a Deutsche Bank report, analyst Andrew Zarnett noted, “The WHO estimated that total loss from the epidemic at East Asian countries was of $20 billion.” He went on to state, “We note that the losses derived from SARS for North American airlines were of ~$1 billion (3.7% drop in...