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Unlike regular economic down turns which begin with a moderate but accelerating decline in economic activity,the arrival and rapid global spread of the coronavirus pose a rare, sudden shock. Lukas Hensel and his coauthors collected contemporaneous data to systematically investigate the development and determinants of economic anxiety at the onset of the coronavirus pandemic in early 2020. They study the underlying psychological mechanisms that shape economic anxiety in the environment of a pandemic by assessing the role of beliefs and information about pandemic risk factors as well as individuals’ subjective mental models of infectious disease spread. Their article has been published in The Review of Economics and Statistics – an international top journal in economics.

This summary is based on Dr. Lukas Hensel's paper, Coronavirus Perceptions and Economic Anxiety, published in The Review of Economics and Statistics.


Guidance Of Economic Anxiety: Start With Coronavirus

The worldwide spread of the novel coronavirus led to a substantial disruption of global economic activity. Understanding the development and causes of economic anxiety in the wake of the coronavirus pandemic is essential from both ascientific and practical perspective, particularly given recent empirical evidence demonstrating that perceptions and expectations about the macroeconomic environment substantially shape households’economic decisions. Dr. Hensel’s article provides one of the first systematic assessments of the rapid emergence and causal determinants of economic anxiety at the on set of the coronavirus pandemic, when there was large uncertainty about the extent of its economic impact.

Their results point to a critical role of subjective beliefs about pandemic risks aswell as mental models of infectious disease spread in shaping public perception of the severity of the contemporaneous health crisis and economic anxiety. An embedded experiment also shows that framing of information about the coronavirus affects how people interpret the information.

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1. Rapid Increase In Economic Anxiety After Coronavirus

To set the stage for the analysis, the authors document a rapid increase in economic anxiety during and after the coronavirus has reached a country. They focus on the period of the initial global spread of the coronavirus during January and February 2020. Leveraging global data on Google searches indicative of economic anxieties, the article documents the evolution of economic anxiety after the arrival of the coronavirus in a country.

The data indicate that the arrival of the coronavirus in a country substantially increased search intensity for topics related to economic recessions, stock market crash, survivalism and conspiracy theories. Additionally, the response of search intensity to the first human-to-human transmission of the coronavirus in a country corroborates these results. This evidence indicates that the arrival of the novel coronavirus leads to a spike in economic anxieties.

They for show that economic anxiety increase further as the novel coronavirus spreads within a country after the first domestic case occurs, through two surveys that measure economic anxiety in the United States. Between March 5th and 16th, 2020, the number of confirmed cases within the United States jumped by a factor of approximately 26, from 176 to 4576. The data indicate that over 11 days individuals’ perceptions of the severity of the crisis strongly intensified and their economic worries substantially increased.

2. Perceptions of Pandemic Risk Factors: Mortality and Contagiousness

To further understand the precise causal relationships between coronavirus perceptions and economic anxiety, they embedded two experiments in the March 5 survey, and examine the role of perceptions of pandemic risk factors along two dimensions. At the time of our first survey on March 5, there was still substantial uncertainty and public disagreement about how severely the US economy would be affected by the coronavirus. Two experiments that allow them to causally assess the impact of individuals’ perceptions of coronavirus mortality and contagiousness on economic anxiety.

The data show substantial heterogeneity in participants’ beliefs about thesecharacteristics of the coronavirus.On average, participants’ beliefs about both the mortality from the coronavirus as well as its contagiousness were substantially higher than official and scientific estimates. These coronavirus beliefs are substantially positively associated with economic anxiety.

To understand whether beliefs about the mortality and contagiousness of the coronavirus causally affect economic anxiety, they administered one framing treatment as well as an information treatment.

For the framing treatment, a random subset of respondents was assigned to receive the “high relative mortality” treatment, while the remaining respondents were assigned to receive the “low relative mortality treatment”, that is, to be informed that the death rate from the coronavirus is “20 times higher than for the flu” or “5 times lower than for SARS”. Subsequently, they elicited participants’ economic worries. The results show that the high mortality treatment causally leads participants to hold higher beliefs about the crisis’ severity for the world and the US, relative to the low mortality treatment. These treatment differences also exist for participants’ economic worries.

In the information treatment part, they randomly assigned some respondents to get truthful information about the contagiousness and then re-elicited participants’ economic worries. The participants were randomly assigned to be either in a “contagion information group” or a control group, which received no information. Based on scientific estimates, respondents in the contagion information group were informed that “approximately 2 non-infected people will catch the coronavirus from a person who has the coronavirus”. Respondents in the contagiousness information treatment show lower worries of about the effects of the coronavirus on their personal economic situation and a small decrease in their worries about the aggregate US economy.

In sum, the experimental evidence indicates that perceptions and information regarding coronavirus mortality and contagiousness are significant causal determinants that shape individuals’ expectations about the aggregate economy and their personal economic situation at a time of high uncertainty.

3. Mental Models of Infectious Disease Spread

So far, the authors documented those economic anxieties evolve dynamically with this spread. To analyze how the anticipation of such development shapes economic anxieties, they investigate participants’ subjective mental models of infectious disease spread to understand the role of cognitive processes and their limitations in shaping economic anxiety in response to the outbreak of the coronavirus pandemic.

To elicit the individuals’ abstract mental models, they asked participants in our March 16 survey to predict the spread of a fictitious infectious disease under simplifying assumptions. Participants were instructed to predict the total number of people infected with the fictitious disease with information provided. The data show statistically significant positive associations between participants’ predictions and their beliefs about the crisis’ severity for the world and the US as well as their worries about the aggregate US economy. While there is no significant association between participants’ worries about their personal economic situation and the predicted number of infected people, which squares with previous evidence that individuals do not fully extrapolate their individual risk from aggregate societal risk.

In sum, the results indicate that individuals who exhibit a more accurate mentalmodel of non-linear growth of infectious disease spread are more worried about the aggregate effects of the coronavirus pandemic, potentially as they foresee a greater potential for a widespread contagion of the population.

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About The Author

Dr. Lukas Hensel is a postdoctoralresearcher of the Department of Applied Economics, Guanghua School of Management, Peking University. He received his PhD from Oxford University. His research interests include development economics, political economy, and behavioral economics. He has published in leading international journals, such as The Review of Economics and Statistics,Journal of Economic Behavior & Organization, and the American Political Science Review.