It happened in Wuhan. Just recently, it happened in Singapore.
When the Singapore government raised the Disease Outbreak System Condition (Dorscon) alert level to orange, its citizens responded by stock piling all essentials.
Pictures of empty shelves in supermarkets and shoppers lining up in long queues filled social media.
It also drew the ire of many online. People were ridiculing, shaming and making fun of these people who hoarded as if to prepare for a zombie apocalypse.
After all, these hoarders are out of their minds, aren’t they?
I would argue it is rational behavior.
Let me explain
Game Theory: The Prisoner’s Dilemma
Let us look at what explanation game theory could offer. If you are not familiar with the prisoner’s dilemma, please read here.
The game here is shopping for enough essentials to prepare you family to tide through a possible country wide lockdown in the near future due to the Coronavirus outbreak.
To simplify things, the two players in this game are you and everyone else.
Additionally, each player can only choose between two actions: either stock up essentials or shop for it normally – buying what they need for the moment.
Another simplification is if either of you stocked up, the grocery store will run out of supplies.
The last simplification is that the store has enough supplies only for one person’s essentials at one time. So if both you and everyone else stock up, you will only be able to meet half of your needs.
Our Hoarder’s Dilemma
So given our conditions, there are 4 different possibilities.
If both you and everyone else shopped normally, we would have met 100% of essentials for everyone.
But if you stocked up and everyone else shopped normally, you would have met 100% of your essentials but everyone else would have 0% because you bought all.
Similarly if everyone else stocked up but you shopped normally, you would have met 0% of your essentials and everyone else met 100%
If both you and everyone else stocked up, both would have met 50% of your essentials. So this case will be worse of for both of you.
So if you shopped normally you would either meet 100% of your essentials if everyone else shopped normally or 0% if everyone else stocked up. Your outcome would be [100, 0]
But if you stocked up, you would either meet 100% of your needs if everyone else shopped normally or 50% if everyone stocked up. Your outcome would be [100, 50]
Game theory states that in a non cooperative game, all parties will make decisions to maximize their outcomes.
Hence, stocking up is the default decision for both because the outcomes are either 100% or 50% compared to if you were to shop normally 100% or 0%
So if you were completely rational, in a non-cooperative setting, you should always stock up to ensure a better outcome for yourself even though it would have been better off if everyone cooperated.
That is how our modern individualistic society works, sadly.
Be Greedy When Everyone Else is Fearful
On the other hand, because of the recent events, the market has been low and it presents an opportunity to start shopping for Chinese equities.
If you have access to the Hong Kong market here are some ETFs that gives you exposure to the Chinese market
As Warren Buffet had said: “Fearful when others are greedy and greedy when others are fearful”