Accounting for panic runs: The case of Covid-19

Professor Gulnur Muradoglu is someone I hold in high esteem. She used to be my Behavioural Finance lecturer at the establishment once known as Cass Business School in London, back in the day when it was still called Cass Business School. It was my first proper academic encounter with behavioural finance, which led to lifelong interest; professor Muradoglu deserves substantial personal credit for that.

Professor Muradoglu has since moved to the Queen Mary University of London, where she became a director of the Behavaioural Finance Working Group (BFWG). BFWG has been organising fascinating and hugely influential annual conferences for 15 years now, as well as standalone lectures and events. [Personal note: as someone passionate about behavioural finance, I find it quite baffling how the discipline has not (or at least not yet) spilled over to mainstream finance. Granted, some business schools now offer BF as an elective in their Master’s and / or MBA programmes, and concepts such as bias or bubble have gone mainstream, but it’s still a niche area. I was not aware of BF being explicitly incorporated in the investment decision-making process by several of the world’s brand-name asset managers I worked for or with (though, in their defence, concepts such as herding, or asset price bubble are generally obvious to the point of goes-without-saying). Finding a Master’s or PhD programme explicitly focused on behavioural finance is hugely challenging because there are very few universities offering those (Warwick University is one esteemed exception that I’m aware of). Same applies to BF events, which are very few and far between – which is yet another reason to appreciate BFWG’s annual conference.]

accounting for panic runs

The panic runs lecture was an example of BFWG’s standalone events, with new being research jointly by Prof. Muradoglu and her colleague Prof. Arman Eshraghi (co-author of one of my all-time favourite academic articles “hedge funds and unconscious fantasy”) from Cardiff University Business School. Presented nine months after the first Covid lockdown started in the UK, it was the earliest piece of research analysing Covid-19-related events from the behavioural finance perspective I was aware of.

The starting point for Muradoglu and Eshraghi was a viral video of a UK critical care nurse Dawn Bilbrough appealing to general public to stop panic buying after she was unable to get any provisions for herself after a 48-hour-long shift (the video that inspired countless individuals, neighbourhood groups, and businesses to organise food collections for the NHS staff in their local hospitals). They observed that:

  • Supermarket runs are unprecedented, although they have parallels with bank runs;
  • Supermarket runs are incompatible with the concept of “homo economicus” (rational and narrowly self-interested economic agent).

They argue that viewing individuals as emotional and economic (as opposed to rational and economic) is more compatible with phenomena such as supermarket runs (as well as just about any other aspects of human economic behaviour if I may add). They make a very interesting (and so often overlooked) distinction between risk (a known unknown) and uncertainty (unknown unknown), highlighting humans’ preference for the former over the latter and frame supermarket runs as acts of collective flight from the uncertainty of the Covid-19 situation at the very beginning of the global lockdowns. Muradoglu and Eshraghi strongly advocate in favour of Michel Callon’s ANT (actor-network theory) framework whereby the assumption of atomised agents as the only unit is enhanced to include the network of agents as well. They then overlay it with the “an engine, not a camera” concept from David MacKenzie whereby showing and sharing images of supermarket runs turns from documenting into perpetuating. They also strongly object to labelling the Covid-19 pandemic as either an externality or a black swan, because it is neither (as far as I can recall, there weren’t any attempts to frame Covid-19 as a black swan, because with smaller, contained outbreaks of Ebola, SARS, MERS, N1H1 in recent years it would be impossible to frame Covid as an entirely unforeseeable event – still, it’s good to hear it from experts).

Even though I am not working in the field of economics proper, I do hope that in the 21st century homo economicus is nothing more than a theoretical academic concept. Muradoglu and Eshraghi simply and elegantly prove that in the face of a high-impact adverse event alternative approaches do a much better job of explaining observed reality. I would be most keen for a follow-up presentation where the speakers could propose how these alternative approaches could be used to inform policy or even business practices to mitigate, counteract, or – ideally – prevent behaviours such as panic buying or other irrational group economic behaviours which could lead to adverse outcomes, such as crypto investing (which, in my view, cannot be referred to as “investing” in the de facto absence of an asset with any fundamentals; it is pure speculation).

Somewhat oddly, I haven’t been able to find Muradoglu and Eshraghi’s article online yet (I assume it’s pending publication). You can see the entire presentation recording here.