Fear vs. Loss
Fear is temporary. Loss is permanent.
Up till this point in time, we mostly feared COVID-19. Now it’s beginning to cause loss.
Loss is much more significant. Loss of lifestyle, jobs, companies, industries, lives, etc.
It's tough to tell exactly how bad the economic impact will be and how much personal loss will happen, hence market volatility and uncertainty.
This article from McKinsey (specifically the brief from 3/16/20) does an excellent example of highlighting what the realistic impacts on the economy, and talks about the time horizon as well. TLDR, there are far reaching impacts from this situation that will not be fixed overnight. If you're skimming, read the paragraphs directly following the two scenarios headlined, delayed recovery and prolonged contraction.
This twitter thread runs through economic modeling of virus spread in the US. The results are alarming.
This article from the LA Times highlights that we could be looking at +/- 20% unemployment, quickly.
These statistics make us afraid. What will be (potentially) be worse is the actual loss associated with the above scenarios.
Loss is permanent. It cuts deep. As human beings, we have trained ourselves to avoid loss at all costs. The cognitive impact pf loss is incredibly impactful on the human psyche.
The loss aversion theory states:
Loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains: it is better to not lose $5 than to find $5. The principle is very prominent in the domain of economics. Humans may be hardwired to be loss averse due to asymmetric evolutionary pressure on losses and gains: for an organism operating close to the edge of survival.
This comes from our ancestors. If they lost, they died. Luckily, its 2020 AD, not 2020 BC, so we'll pull this back around.
From a business perspective:
FEAR is when the stock of the company that you work for/own shares of, craters significantly, and you lose 50% of your portfolio. This sucks and makes you uneasy.
LOSS is when that company goes bankrupt. You lose your job. Your investment goes from a 50% potential loss to a $0 basis.
From the COVID-19 perspective:
FEAR was the initial spread of this virus. The explosion of cases over in China was so far away, so distant. They live completely different lives and have a different healthcare system. Even in Europe, still, they live on top of each other. We hear stories of countries on lock down, but that can’t happen here in the US.
Over the past weeks/days, this narrative has changed dramatically. Not only is the US heading towards lock-down (some already are) but the spread of COVID-19 will continue to rise dramatically as more people are exposed, and we test more people/get accurate results.
That means we’re going to experience LOSS.
Hopefully, its not the loss of too many lives, hopefully it’s not the loss of too many jobs and companies, but there will be loss associated. We’re beginning to see it already. Even if you simply test positive for the virus, you lose all personal privileges for 14 days. You're silo’d in personal quarantined jail.
It will be interesting to see the impact of fear vs. loss in the upcoming weeks and months.
PLEASE - remain positive! We'll make it through this! Don’t panic and buy into the fear-mongering that the world is coming to an end. History has shown we’re extremely resilient, and the government is demonstrating (House + Senate passed a stimulus bill late yesterday as well) they are willing to do whatever it takes to get us through this. Private + Public sector companies are coming together to make this possible!
China’s new cases have dropped significantly (close to 0) and Italy’s new cases appear to be leveling off as well!
BUT - BE SMART in these uncertain times. We’re +/- 10 days behind Italy and far more behind China.
Time, as always, is our most precious commodity. Anything we can do as a population to buy more time for healthcare professions to treat the virus / stop the spread / and work on a cure or vaccine is the most beneficial use of time we have!
Follow on Twitter for shorter thoughts and more updates @itschriskeith