Option value

Like most of us, I’m not expert on epidemiology. But I have spent most of my life studying risk management. In the current crisis, one of the most relevant issue,s and the one that policymakers seem to be ignoring is that of option value. To see what’s involved, consider a policy choice like shutting down bars and cinemas, as opposed to waiting two weeks to see what happens. If, in two weeks time, it turns out the virus has been contained, the ban can be reversed and the loss is that of the two week shutdown,. On the other hand, if the virus spreads through contact in these venues, there is no way of limiting the damage to two weeks.

Nearly all the time, this reasoning favors aggressive early action. The exceptions are actions like cancelling events scheduled some months in the future. Deferring the decision would increase losses in the event of a cancellation, but keep open the option of going ahead if the situation improved.

Sadly, there seems to be no sign that those in charge of the policy response understand this. Rather, the reasoning seems to be to wait until they are sure a risk-reduction measure is necessary before implementing it. That is a recipe for avoidable disaster.

64 thoughts on “Option value

  1. Follow up re herd immunity.

    “As a virologist, I’m totally unnerved by it. I don’t like it, I say it’s got a touch of eugenics, which I’m frightened about,” he says.

    “I feel nerve-wracked about it, I think it’s kind of a huge experiment when you’re indulging letting the virus go like this, rip through the community. People will die. What will their relatives say?

    “The whole thing is a bit of a farce — and a dangerous farce.”

    https://abc.net.au/news/2020-03-19/what-is-herd-immunity-and-could-it-stop-coronavirus/12059968

  2. Iko: I’m with Saez/Zucman here. We face the crisis with the economic system we have. Most workers are dependent on capitalist employers to make a living. If the employer goes bust through force majeure, and not as a result of their own mistakes, the workers will suffer more. There is no moral hazard issue, nobody planned this. A general bailout as Saez/Zucman propose does not help one group of capitalists more than another, or capitalists more than workers. Unless Trump designs it of course.

  3. My first reaction to all those ridiculous people crying they are bankcrupt in a weak and need a bigger bailout then the one already anounced the second the shotown was ordered was to get quite angry. Well i´m stil angry and i still think it would be better if most of those who cried first and loadest would go bankcrupt sooner rather than later, which they will do anyway with or without Cornona within the next two years. But then, the rational part of my brain thinks it will be hard to avoid that they all get undeserved money since it´s virtually impossible to avoid that in a situation where it seems adequate to throw loty of money fast at almost anyone.

  4. James Wimberley March 17, 10:49 pm, “Thr political response to the epidemic is plainly non-linear, not the application of a constant bias.”

    Wrong for here where the response has been linearly concerned with keeping the fragile ponzi economy ticking over with bau, with price and rent maintenance of pollies and others extensive real estate investment portfolios linked to that bau, with house prices and re-election prospects, with concern for large political donor prospects, and with concern to sustain bau for a budget buffer following a crash in the number of old leaners.

    James Wimberley March 19, 6:40 am, “I have calculated that the daily growth rates of reported virus infections over the last 7 days where I live are: Spain 42.5% Andalucia 25.6%…”

    Here there is the densely populated urban coastal fringe of the continent, and the sparsely populated “regions”. Here the desired smocorona contagion spread doubles nationally every few days. Several hundreds of thousands can be expected by the end of next week, but the hugely indebted unis will mostly have their H1 student fees locked in by then and their bankers will draw a little breath… so far so good…

    “The one explanation I can think of is that Andalucia is warmer and drier than most of Spain. If that’s so, it might be good news for Australians.”

    We should be so lucky … Fed Ed Minister Tehan on national radio this morning said Australian schools should all remain open as there is not a rapid spread of smocorona virus seen in “regional Australia”. We’re doomed. Tehan is doomed.

    “Spain has a pretty uniform heath care system, so I doubt if the gap is a reporting artefact.”

    Ditto mostly for Australia.

    “A slower growth rate has two benefits. If containment works, you end up with lower ultimate infection and death totals (but lower herd immunity for a rerun). If it fails, you have flattened the curve and lowered the risk of overwhelmed hospitals and triage for respirators etc.”

    First there has to be an early meaningful attempt at containment. Do that and the banks, the markets, and the budget etc collapse and are gone. Don’t do that and the old leaners collapse and are gone – if that is dog’s will. Choices, choices, enie, meany…

  5. Individual response to COVID-19 ‘as important’ as government action
    https://www.sciencedaily.com/releases/2020/03/200306183353.htm
    Date:March 6, 2020 Source:University of Oxford
    Summary: How individuals respond to government advice on preventing the spread of COVID-19 will be at least as important, if not more important, than government action, according to a recent commentary.

    “…(Professor Sir Roy Anderson at Imperial College) said: ‘Government needs to decide on the main objectives of mitigation — is it minimising morbidity and associated mortality, avoiding an epidemic peak that overwhelms health-care services, keeping the effects on the economy within manageable levels, and flattening the epidemic curve to wait for vaccine development and manufacture on scale and antiviral drug therapies. We point out they cannot achieve all of these — so choices must be made.’

    …In comparisons with influenza-A (usual seasonal flu) and SARS, it currently seems likely that the epidemic will spread more slowly, but last longer, which has economic implications. Seasonal flu is generally limited by warmer weather, but as it is not known if this will affect COVID-19, the researchers say it will be important to monitor its spread in the Southern Hemisphere.
    … Author Professor Hans Heesterbeek from the Department of Population Health Sciences at the University of Utrecht said: ‘Social distancing measures are societally and economically disruptive and a balance has to be sought in how long they can be held in place. The models show that stopping measures after a few months could lead to a new peak later in the year. It would be good to investigate this further.'”

  6. I’m not convinced by the ‘overreact’ early argument as a model of risk management for public policy matters. It leads to a perpetual state of reaction to crisis, real and imagined. It biased in favour of an active interventionist role for government. A measured calm response is usually better. What if the Americans had just nuked Cuba in the early days of the crisis? It also assumes that early overreactions are easily reversible, when obviously there is a degree of stickyness there.

  7. “Overreactions” of various kinds are not comparable. Nobody sensible is advocating “overreact to everything”. Exponential growth of real problems, like an exponentially growing pandemic, are a very special kind of crisis. Humans are very poor at understanding and visualizing exponential threat growth crises in real systems unless they are trained in the the hard sciences and mathematics. The rapid growth of the crisis is inconceivable to untrained people until the see it in real life action. Then they suddenly become believers in reacting very early and hard (not actually overreacting at all) to these kinds of crises. Come back in 3 , 9 or 12 months and tell us you still don’t believe we should have reacted earlier and harder re this global pandemic crisis.

  8. Ikonoclast says: March 20, 2020 at 9:03 pm
    “Exponential growth of real problems, like .. The rapid growth of the crisis is inconceivable to untrained people until the see it in real life action.”

    Like … Everywhere near and far from whenever, the accelerating expansion of the cosmos … Closer in time, global human population growth … Close to home near and present danger, the Big Australia Ponzi population scam…

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