Understanding our biases when it comes to COVID-19 Risks…

While some of the dust has settled on COVID-19, this pandemic is still having ripple effects in economies throughout the world.  A variety of biases[1] have been shown to be ubiquitous in our ability to be proactive when it comes to ameliorate the effects of catastrophic events.

Bias #1, Myopia bias.  We tend to view what is directly in front of us with a higher degree of importance than events that are far off in the future.  Budget dollars are given higher priority for near-term projects while low-probability events such as planning for a 50-year storm are provided less priority. 

Psychologically this bias makes sense.  Most of our decisions are in the near term.  As it pertains to danger, we would immediately avoid the backside of a skunk while not caring much – if in our speedy avoidance of danger – our new suit pants get a tear in them that would cause us time and money to fix.  As it pertains to rewards, a tasty chocolate treat now provides much more satisfaction than achieving our goal weight at some point off in the future.

Bias #2, Amnesia bias.  We tend to forget catastrophic events over time.  The authors of The Ostrich Paradox use a story that many of us are familiar with in explaining this bias – learning to ride a bike.  It takes a while to learn to ride a bike and we fall a few times, obtaining some cuts and bruises along the way.  So long as a major injury does not occur that forever scars us from climbing back on the bicycle seat again, we soon learn to pedal at enough of a pace that matches our ability to balance and voila! we achieve the satisfaction of having learned to ride a bike. 

So too it is with major disasters.  Psychological research suggests that low-probability, yet high-impact events suffer from the same problem in that the pain wanes over time, thus becoming discounted.  

Combined with other biases, for example the Myopia bias, organizations again prioritize near-term needs over that which is perceived to be far off in the future.  In the aggregate, the process repeats.  People and organizations again build along hurricane-risk coastal lands, seismic & tsunami zones, and so on.

Much has been made of the shortage of Personal Protective Equipment in the United States over the last few months.  How often have we considered the following information?

The hospital industry, in a bid to increase profit, slashed inventory of all supplies.  Rather than bulk up after the swine flu, hospitals turned to inventory-tracking software to winnow stocks of protective gear and other supplies, hoping to be able to replenish it as needed.

Manufacturers got bitten during the swine flu, ramping up production only to be left with few buyers when that crisis abated.  Many mask and other device makers rebuffed later calls to build back emergency capacity, ceding a chunk of the market to overseas makers.

The U.S. government focused more on preparing for terrorism than for a pandemic.  Despite the severe 2009 flu, the governments lacked a permanent budget to buy protective medical gear for its Strategic National Stockpile of supplies for health emergencies.[2]

If we are to take it at face value, the catalyst for today’s shortage in PPE was the behavior and attitudes from over a decade ago!

Value often arises from variables that are not immediately quantifiable in today’s financial statements.  At Oak Hill Business Partners, we help organizations and their owners build value in their organizations by examining the tradeoffs between short term and long term return on investment, along with other tough decisions faced by today’s business owner in an increasingly demanding marketplace. 

This is the first in a series of three blogs that discuss how biases worsen the effects of catastrophes.  For more about how your business can benefit from consultation in the area of risk mitigation coexisting with value creation please visit Jason’s profile.

Jason Sellnow is a partner with Oak Hill Business Partners specializing working with business owners to provide business strategy, operational finance, and exit planning.  Jason is a Certified Management Accountant and a Certified Exit Planning Advisor.

Oak Hill Business Partners is a boutique management consulting firm serving lower-middle market closely held companies. Based in Milwaukee, Wis., our partners focus on helping growing companies become scalable by applying functional excellence in finance & administration, sales, marketing, and operations.  Oak Hill also helps company owners plan and execute transition/exit planning holistically. Oak Hill partners work with a team of advisors including wealth and legal advisors to help owners understand their options for transition in the business and execute the plan that meets their specific needs.

[1] The Ostrich Paradox, Why We Underprepare for Disasters, Meyer & Kunreuther, Wharton School Press; The Ostrich Paradox discusses six biases in total.

[2] Wharton Ready webinar, 25th May 2020, hosted by Gad Allon & Santiago Gallino.

Posted by Erik Owen