What is the difference between risk and uncertainty and how our decision-making approach should differ in each scenario. Why pandemics are highly uncertain and should be treated as such.
Topics covered include:
- How the coronavirus pandemic is far worse than other pandemics this century.
- How humans have a difficult time accepting that things won’t return to normal.
- What is the difference between risk and uncertainty.
- How we make decisions should differ if something is uncertain versus risky.
- What is the minimax regret approach to making decisions under uncertainty.
- How stories help us deal with uncertainty.
- How the story driving financial markets has changed.
- What is the duration and severity of bear markets during a recession and how large have bear market stock rallies been.
- What will it take for the pandemic to end and to be more confident about the future.
Forecasting COVID-19 impact on hospital bed-days, ICU-days, ventilator-days and deaths by US state in the next 4 months by IHME COVID-19 health service utilization forecasting team—Institute for Health Metrics and Evaluation
Learn more about uncertainty and risk
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 293. It’s titled, “Making Decisions: Uncertainty Vs. Risk.”
The torn social fabric
We have been sheltered in place here in Phoenix for over 2 weeks now. There are 5 of us. We’ve spent a lot of time walking the dog, taking hikes, doing our best to stay at least 6 feet away from strangers. I’ve only gone to the store once, to the grocery store, about 10 days ago. Most of our food is now delivered. I’ve spent a lot of time reading. Two kids spending a lot of time taking online classes for college. We make dinner together and occasionally watch a movie.
Life, admittedly, is much easier for me than for many of you who have young children at home and you’re trying to, at the same, homeschool them, or help them with school, and pursue your professional activities.
I like this description by Masha Gessen in the New Yorker. She wrote, “The social fabric is being torn in unprecedented ways owing to school closings, a widespread shift to working from home, social distancing, sheltering in place. Whereas we used to share dozens of experiences a day with friends, acquaintances, and strangers from riding the subway, to working in an office, standing in line at lunch, going to a concert, eating at a restaurant, chatting to an Uber driver. Many of us have been reduced to sharing only isolation and the fear of chance encounters. If either of those can be said to be shared.”
The impact today
In early February, episode 286 of the podcast, we looked at the coronavirus and the financial impact of pandemics. At the time I said we didn’t know how severe this would be from a health standpoint because epidemiologists and other health officials were still trying to determine how deadly the virus was, how contagious, how it spreads, and what treatment mechanisms work the best. In some regards, they’re still uncertain.
I was hopeful on the financial and economic fronts that the permanent impact would be minimal and the recovery quick. I mentioned the Federal Reserve had never cut interest rates in response to a pandemic.
At the time there were 27,000 confirmed cases of COVID-19. The vast majority in China. Now there are over 800,000 cases, according to data from John Hopkins University, most outside of China. There have been over 38,000 deaths. In the month of March alone U.S. cases have gone from 98, just 2 digits 9,8, to 164,000. Germany from 159 confirmed to 67,000. Italy from 2,000 to 102,000.
The number of cases and deaths have far exceeded the SARS virus in 2003, MERS in 2012, Ebola in 2014, and the Zika virus in 2015. The number of cases is much less than the H1N1 influenza virus from 2009, commonly known as the swine flu. That virus, there were 61 million cases in the U.S. alone, 12,000 deaths. The mortality rate was only 0.02% whereas the mortality rate globally for confirmed cases of COVID-19 is 4.8%. In the U.S. it’s about 1.9%. Now there’s still a lot of uncertainty about what the final mortality percentage will be.
In China, COVID-19 confirmed cases went from 80,000 to 82,000 in March. The number of cases is probably underreported. But if there was a large-scale outbreak in China, a 2nd wave, the world would know. It would show up in the real-time data you see in China, in terms of percent or energy usage, traffic, the use of public transportation, all of which are down significantly but have been improving, which suggests that hopefully the coronavirus is contained in that country.
In the U.S. the Trump administration has extended social distancing guidelines until the end of April. There’s controversy regarding if there are there enough tests or enough ventilators and masks. Whether we should be wearing masks or not. This is our new reality. In the midst of this new reality, there are a couple of anecdotes that keep coming to mind
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