[4] Faberman, R J, Mueller A I and Sahin, A (2022), “Has the Willingness to Work Fallen during the Covid  Pandemic?”, NBER Working Paper, 29784. [5] IMF (2023), “Staff Discussion Notes: Geoeconomic Fragmentation and the Future of Multilateralism”,  The International Monetary Fund, January 15. [6] Goes, Carlos., and Eddy Bekkers (2022), “The Impact of Geopolitical Conflicts on Trade, Growth, and  Innovation”, World Trade Organisation, July 4. [7] Source: Bain and Temasek, with contributions from Microsoft, Southeast Asia’s Green Economy 2022  Report: Investing behind new realities
Should a crash occur, however, risk-taking incentives go into reverse gear. Their closeness to a disaster event causes drivers to move more slowly than might be justified by the underlying risk. The experience heuristic leads to an over-weighting of recent, severe, personal events. Risk appetite then switches from too high to too low relative to the true risk. The result is traffic congestion. Financial crashes and car crashes have common psychological roots. One of the causes of the crisis was an under-pricing of risk. That was rooted in disaster myopia – an under-estimation of risk during the so-called Great Moderation. Memories of financial disaster had faded, with the Great Depression in almost no-one’s experience sample. The upshot was an over-healthy appetite for risk-taking. The subsequent crash has turned these behaviours on their head. Memories of financial disaster are now fresh, as after the Great Depression, causing an over-estimation of the probability of a repeat disaster. In these situations, psychological scarring is likely to result in risk appetite and risk-taking being lower than reality might suggest. Risk will be over-priced. Today, the very disaster myopia that caused the crisis may be retarding the recovery. Disaster myopia may be more potent in the markets than on the motorways. Asset prices are guesses about the future. Faced with uncertainty about the future, market participants form these guesses using their own heuristics. One such heuristic is the “popular narrative” – a simple story that aims to make sense of reality.