How the Risks of Investing and Covid Are Similar

Investing and Covid can be similar.

The reason is risk…but not how you might expect.

Risky Behavior

Investing

Because of historically low interest rates and the threat of inflation, the return from conservative investments like U.S. Treasury securities could sink further. Consequently, the current bull market looks increasingly attractive.

And that could be the problem.

Swiftly offsetting a 34 percent Covid crash, stocks have been up 22 percent. Recognizing also that so far this year, the market has hit 54 new S&P 500 highs, like the Sirens that Ulysses could not resist, this market is alluring.

It also feels rather safe.

The result? Our risky behavior escalates. A Wall Street Journal columnist cites a day trader who held as many as 160 stocks, and quickly bought another one when he saw an after-hours trading decline. As the trader explained, “I said to myself, ‘I’ll just load up and make a killing tomorrow when it goes back up.'” But the stock did not go up.

We could say that perceiving a “safer” market, he persisted with riskier behavior.

Covid

For Covid too, we can connect our safety and risk. Knowing that vaccines can prevent or mitigate the severity of Covid, we have been going to restaurants, bars, and malls. We developed a heightened sense of safety that minimized our protective strategies. A new paper even suggests that we have had successive Covid waves because vaccines made us feel safer.

Out Bottom Line: The Peltzman Effect

University of Chicago economist Sam Peltzman hypothesized that safety regulations can create risky behavior..Called the Peltzman Effect, he thought that we drove more carelessly because of seatbelts. It is also possible that cholesterol reducing statins create the incentive to consume less healthy food. And wearing a back lifting aid could mean we pick up heavier objects.

Typically, a similar set of criteria characterize the Peltzman Effect. First, we should be able to identify clearly and even see whatever makes us feel safer. Next, we need the motivation to offset the new safety constraints and the control to do so. Then finally, we need to feel that safety has increased. For investing and Covid the four criteria fit. Each has a visible and believable safety boost and a pent-up desire to unleash restrained behavior.

So yes, with investing we are in a steadily climbing market while for Covid it is a vaccine. With both, when our assessment of risk diminished, so too did our safe behaviors. We invested and behaved with greater abandon.

My sources and more: WSJ‘s Jason Zweig, always insightful, spoke about risk. Then, the ideal complement, Brookings looked at the Peltzman Effect in 2006 while the same ideas were discussed for the pandemic here. And at econlife, too, we have looked at the Peltzman Effect. Please note that several of today’s sentences were in  previous econlife post.

Finally, you might enjoy (as did I) this video of Sam Peltzman explaining the Peltzman Effect.