Behaviouronomics: Of Parachutes, Road Safety, and the Second Wave

As the second wave of Coronavirus is sweeping across our country, it has left many perplexed. With more than 6.5 crore people vaccinated and the new normal of masks and sanitizers, why does the pandemic seem to be taking a U-turn?

I recently saw a news about a doctor lamenting, “I treated thousands of patients with Covid 19 for the last several months and never caught the infection. But within days of taking the vaccine, I became positive.”

How come? Is vaccine reducing the immunity? That’s absurd.

Well, we have a behavioural bias to explain the phenomenon and it’s called the Peltzman Effect. But before I get into that, here’s an interesting trivia —

Statistics reveal that even though skydiving equipment has made huge leaps forward for improving reliability, the fatality rate has stayed roughly constant when adjusted for the increasing number of participants.

Think about that for a minute and see if you can come up with an explanation.

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Today, no skydiver jumps without a backup parachute. When a skydiver knows that there’s a backup for the emergency, wouldn’t he feel safer? And there lies the catch — feeling safer. What do you do when you feel safer?

You lower your guard. Don’t you?

So the backup parachute and other safety measures seem to reduce the risk only for a short while until the skydivers start feeling safer and, unfortunately, overconfident. This overconfidence promotes the skydivers to attempt even riskier manoeuvres which defeats the purpose of having the additional safety.

That’s Peltzman Effect, named after Sam Peltzman, an economist from University of Chicago. Peltzman studied the impact of seatbelt laws on automobile death rate and concluded that seatbelts had failed to bring any significant reduction in highway fatalities. Sam’s argument was that drivers compensated for the perceived increase in safety by taking more risks. While the use of seat belts increased the safety inside the vehicle, it also made people drive recklessly. As a result, the frequency of accidents increased causing more fatalities outside the cars. In the end, safety measures merely transferred the risk from one set of people to another.

In other words, as people perceive that an activity has become safer, they tend to compensate for the risk by indulging in riskier behaviour.

And that’s what is happening in case of COVID. The vaccines are giving a sense of security which is causing people to indulge in risky behaviour, i.e. not wearing mask, violating social distancing norms, etc. And like reckless driving causing harm to other people on the road, risky behaviour during pandemic creates risk for other people (who may be taking all the safety measures) also. Overall, the risk in the system goes up and so do the coronavirus numbers.

Vaccine is just one factor. As the infection numbers came down in the beginning of this year, it must have created a sense of relief among the masses. That’s evident from the fact that there was a drastic decline in the usage of PPE kits by the healthcare workers.

The breakneck developments in technology is making our life more comfortable and safer. But the instinct to seek risk is an evolutionary trait which we humans find hard to control.

What about investing?

A few decades back, investing in stock markets in India was ridden with a lot of risks. Small investors were routinely taken for a ride by greedy promoters and unethical brokers. There was no way to guarantee that the stock certificate one got was a fake or genuine one. An investor had to do a lot of due diligence, apart from studying the business fundamentals, before buying a stock. Moreover, the process of buying and selling stocks was slow earlier. It took few days, even weeks, to get the delivery of a stocks and then similar time to sell it. Put simply, the capital markets were heavily rigged against small investors.

Today, with SEBI, dematerialisation and electronic trading, all the risks cited above don’t exist. The rules and regulations of SEBI are making the safety net stronger and wider for retail investors. But is it translating into less risk? Peltzman effect would predict that the risk associated with stock market investing hasn’t reduced. The nature of the risk might have changed but the overall risk remains same. The retail investor stands to lose less money because of unscrupulous promoters and brokers and more money because of an individual’s tendency to go out on a limb. The increased ease of investing in the stock market has attracted millions of new investors who view markets as a way to get rich quick. Discount trading, instant stock price alerts, easy credit, frictionless access to derivatives and abundance of stock tips on internet ensures that overall the retail investor loses more money than what he did 25 years ago.

Peltzman effect reminds us that we need to make appropriate provision for the possible surprise that future holds.

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