Investors can learn a psychological lesson or two from swine flu

Investors can learn a psychological lesson or two from swine flu

We're all experts in epidemiology now and it is, therefore, with some trepidation that I add to the canon of knowledge on this subject.

By Tom Stevenson
Last Updated: 9:02PM BST 29 Apr 2009

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Like most people, I know nothing worth listening to about viruses or pandemics but the medicine is only half the story. Just as interesting, especially to investors, are the lessons swine flu can offer about human behaviour and psychology. Here are six:

1. What's in a name? A rose may smell as sweet by any other name but the tag we hang on an illness can have real economic significance. The World Health Organisation plumped for swine flu because the virus involved is more porcine than avian or human. Sorry pigs. And sorry the pig-breeding and rearing industry. A number of countries have already slapped a ban on Mexican pork exports, despite the fact that the flu cannot be passed on through meat. Previous flu pandemics have adopted the name of their country of origin but here too mistakes are made – the Spanish flu of 1918-1919 apparently started in Scotland. Fortunately memories are short and, even if this outbreak comes to be known as Mexican flu, the tourists will be back soon enough.


2. Heads you win, tails I lose. Which is worse, do you think, a high mortality rate or a high infection rate? As an individual, I'd prefer it if there were a good chance I caught the flu but a slim chance it would kill me. My employer might be less relaxed about high numbers of its staff staying in bed for a week. More broadly, business would suffer if a highly infectious strain kept people at home (and out of the shops) for fear of getting sick. But fear could be an even greater factor if, as in Hong Kong six years ago, it was relatively hard to get infected but relatively easy to die if you did.

3. History is bunk. Having already mentioned Spanish flu and SARS, I am hardly one to say that historical comparisons are of limited use. We can't resist them, though. Smack bang in the worst economic slump since the Great Depression, we're now facing the worst pandemic since the Great War. But the world was rather different in 1918 as millions of troops criss-crossed the globe on their way home from the front line. The Spanish flu may have killed more people than the First World War but that doesn't necessarily tell us much about today's circumstances. SARS, too, was apparently a completely different type of virus and it was restricted to Hong Kong, quite different from the rapid spread of today's outbreak.

4. The appliance of science. Investment banks have always picked up their fair share of physics PhD graduates – who do you think dreamt up all those complex derivatives? – but otherwise the City and science tend to keep their distance. Because investors do not understand science well, they either over-react to it or are complacent about it. If investors and regulators had had a better understanding of the way in which complex systems work in the real world (hurricanes, pandemics) they might have been less relaxed about the impact that a modest shock such as a decline in US house prices could have on the global economy.

5. Black swans and sick pigs. While we were all watching the oil price or the cost of chartering a freight ship, the end to the seven-week share price rally flew in unnoticed from a country few were keeping an eye on. Like the Australian black swan that ended the idea that all swans are white, the poorly Mexican porker was the "unknown unknown" that, perhaps temporarily, slammed the brakes on the nascent equity bull market. And, who knows, there may be worse to come. When HSBC announced in 2007 that it had problems at its Household subsidiary in the US, few imagined what it would lead to.

6. The final lesson from the last week is that markets react to unfolding events both very quickly and far too slowly. The usual suspects took an immediate pounding when the news broke – airlines, travel companies, hotels, retailers – so it is tempting to think that, having missed the first knee-jerk response, it is too late to react to a market-moving story. But selling banks was the right thing to do for months after it was apparent that they were in trouble. The reason markets sometimes move slowly is that they don't benefit from hindsight. If a pandemic occurs, with a further reduction in GDP hitting severely weakened economies, the market's apparent complacency today will seem odd. If the outbreak peters out, it will look like investors were right to ignore the media storm. Sadly, we won't know until it's too late.

http://www.telegraph.co.uk/finance/comment/tom-stevenson/5246246/Investors-can-learn-a-psychological-lesson-or-two-from-swine-flu.html