Misbehaving in a Pandemic

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The Covid-19 virus is messing with all our heads, and that can cause investors to make some classic mistakes. Meanwhile, government stimulus efforts could lead to some skewed incentives for consumers and businesses. Edward Jones investment strategist Nela Richardson, who holds a doctorate in economics, joins the “What Goes Up” podcast this week to give her diagnosis of the role behavioral economics plays in the pandemic. Some highlights of the conversation are below.

On investor psychology:

“What we’re focused on, it’s not just the markets, but the emotional reaction to the markets. This is the time when the behavior economics come into play. All those things that we warn about that investors do, the mistakes investors make. This is the time where they make those mistakes. They try to time the bottom of the market. They try to sell at the peak. And along the way, they miss the rally. And we’ve seen the markets rally over the last few days. We’re trying to both inform them from a market level, but also make sure their behavioral reactions are not ones that make them derail their long-term goals.”

On potential side effects of emergency efforts by the government and central banks:

“Economists are really concerned about incentives. And when you have a kitchen-sink approach, you don’t think a lot about incentives in doing that kind of legislation.  And that could be where the rubber meets the road. Are we changing behavior in unexpected ways by the way we are trying to stimulate the economy in a time of crisis?”

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