The Covid-19 shock of spring 2020 was unexpected and had severe impacts, including a decline in living standards and increased economic anxiety. In several sub-Saharan African countries, restrictive economic measures have been strictly implemented, despite the low number of sick and dead cases.
A growing body of research points out that shocks (such as economic, climate, or conflict shocks) can alter personality traits and individual preferences, thus contradicting the assumptions of standard microeconomic theory. The results of this literature vary considerably from article to article, but have identified mechanisms such as changes in attitudes to risk due to the negative consequences of shocks and emotional responses to stress and fear.
Risk and time preferences permanently affected
A recent study by Delphine Boutin, Laurene Petifour and Haris Megzari shows that the impact of the Covid-19 shock was severe, as it permanently affected people’s risk and time preferences, which are fundamental in any decision-making process. It also shows that the emotional channel overrides more concrete explanations, and that preference changes persist over time.
More specifically, this empirical study examines the impact of the Covid-19 crisis on the risk and time preferences of women working in the informal sector in Ouagadougou, Burkina Faso. The original data were first collected in January 2020, before respondents were aware of the imminent Covid crisis. Two more waves of data collection on the same respondents took place immediately after the end of the restrictive economic measures (June 2020) and 18 months later (January 2022).
The empirical identification strategy is based on a before-and-after comparison that includes individual fixed effects to isolate the variation in risk and time attitudes in response to the Covid-19 shock. Two time horizons are examined: a short-term impact on a balanced panel of 871 women interviewed twice (in January and June 2020), and a medium-term effect on a sample of 366 women interviewed three times (in January and June 2020 and in January 2022). To elicit information on risk attitudes and time preferences, hypothetical games on a series of lotteries were used.
Higher loss aversion in lotteries
The analysis reveals a short-term increase of 12% in risk aversion when lotteries are presented as monetary gains. This means that individuals become more risk-averse when presented with the possibility of winning money. Furthermore, the study showed that 18 months later, risk aversion in the domain of gains had not returned to its pre-Covid level, as there was an 11% increase between the baseline (January 2020) and the endline (January 2022), once time-varying characteristics were taken into account.
The study also shows that the instability of risk aversion is greater when lotteries are presented in terms of losses, with risk aversion decreasing by 47% in the short term. It remained at this level in the medium term, as there was also a 46% drop between the baseline and the endline. The reversal of the sign of the effect as a result of framing is consistent with Kahneman and Tversky’s (1979) reflection effect, which postulates that preferences are reference-dependent, inducing risk aversion for gains and risk-seeking when presented with the possibility of losing money. Furthermore, the present preference increased by 20% over the short-term period and by 15% over the medium-term.
Overall, the study suggests that the Covid-19 crisis significantly impacted individuals’ risk and time preferences. The medium-term analysis shows that the short-term effects persisted over time. Although the role of other determinants of preference changes cannot be completely ruled out as the time horizon widens, this analysis indicates that the Covid-19 crisis has lasting effects on risk and time preferences.
Effect driven by emotions
The researchers aim to identify the transmission channels that caused changes in risk and time preferences following the Covid-19 crisis. They compare changes in preferences based on individuals’ self-reports of their actual Covid-19 experiences (such as contamination of the individual or someone close to them, loss of a job, or difficulties in fulfilling basic household needs during the lockdown period) and their concerns about the pandemic.
The results suggest that the actual consequences of Covid-19 (such as job loss, lower wages, or poor health) do not significantly affect preference instability. In contrast, preference instability is exacerbated when the respondent expresses concerns about the Covid-19 crisis, particularly economic concerns and catastrophic scenarios such as the economy’s collapse.
Exposure to different media types reinforces emotional responses, increasing risk perception and anxiety. As a result, the most informed individuals showed greater changes in their preferences over the study period (although it is impossible to know the type of information assimilated or its veracity).
The researchers also found that social networks, as the primary source of information, exacerbate preference instability. Traditional media such as television, radio, newspapers, and discussions with family and friends do not affect preference variation. Taken together, these results suggest that the emotional channel is dominant in Covid-19-related short-term variation in risk and time preferences.
Policies should account for instability of preferences
The study has several implications, both in terms of empirical analysis and policy. The stability of preferences is a fundamental principle of economic theory, and a practical one from an empirical perspective since it implies that preferences can be considered exogenous to any outcome of interest. If preferences change in response to life shocks, any empirical analysis involving preferences is subject to potential reverse causality and simultaneity bias.
Moreover, policies based on the assumption of stable risk and time preferences cannot predict appropriate behavioral responses in a post-shock period. When individuals exhibit greater impatience and a more risk-friendly attitude toward losses following a shock, they are potentially less likely to use insurance. Given the low uptake of voluntary insurance in developing countries, the results could lead to advocacy for insurance models that encourage people to enroll, such as mandatory enrollment.
Finally, the study provides causal evidence that preferences can change rapidly in response to a shock and remain permanently at that new level. This non-return to normal is surprising, given that the emotional channel is identified as the primary driver of these changes. In contrast to previous literature, the study suggests that the emotional response to the Covid-19 crisis altered, at least in the medium run, global and/or contextual risk perception.