Why People Hoard and How Game Theory Can Help Stop a Crisis?

This is part of my pamphlet series Pandemic Chronicles that looks at the Coronavirus public health and economic crisis with the lens of game theory.

Hoarding behavior is not new. It happens when people feel the need to accumulate things regardless of its perceived value whether they’re sports cards or antique pens. During a normal environment, collecting goods for private consumption does not harm anyone; it reflects that person’s individual preference. But during a public health crisis, like the COVID-19 pandemic or the Spanish Influenza 100 years ago, hoarding behavior negatively affects other people and society. There are several reasons why:

  • Amassing goods takes away the supply of goods for people who need it more like the elderly, women and children.
  • Piling on large quantities causes supply disruptions and artificially increases prices and thus opening opportunities for black markets. Black markets draw in actors with perverse incentives to manipulate and take advantage of other consumers.

To understand what drives hoarding and potential ways to address it, we can draw lessons from game theory and the economics of stockpiling.

Shoppers vying for last unit of paper towels.

The Psychology of Hoarding

Individual hoarding can impact society when it becomes a larger panic buying scenario that causes rationing and irrationally high prices. In a crisis, where people, markets, and government may not have all the answers, it fuels a desire to hoard. When the COVID pandemic struck with the first wave in 2020, it wasn’t uncommon to see empty shelves at American stores, especially for consumer goods such as hand sanitizer and a range of toiletries. At the store, customers are behaving in strategic interactions of whether to stock up on certain goods or engage in normal buying based on their needs for the day or week. However, in a pandemic, thew news and social media can fuel anxiety and the perception of scarcity. If panic sets in, customers have reasons to stockpile.

Consider a scenario where two customers walk into a store:

In this situation the customers make independent decisions whether they should engage in normal buying behavior or hoarding. They both have all information available to make a decision, including the price and quantity on the shelf. It’s been a tense few weeks since COVID cases have spiked and the area is still in locked down except for essential businesses. Social media communities have shared posts of stores running low on supplies. On the way in there was a line of customers who had already filled up their shopping cart with supplies.

With that backdrop, Customers 1 and 2 arrived at their relevant aisle. For Customer 2, if she thinks that Customer 1 will try to hoard, then Customer 2 best hoard because if she acts business as usual, she would not able to get the item she needs. Vice versa, when Customer 1 thinks that Customer 2 will hoard, he has an incentive to panic buy. When both customers choose to hoard, the whole store is worse off. Ideally, both customers adopts normal buying behavior but in a non-cooperative situation where newspaper and social media propagate fear and anxiety, grocery stores had to take drastic actions by imposing quota per customer which is an enforcement mechanism against individual irrational actions that harm the public good.

Stores impose rationing policy with 1 unit/household cap

Hoarding more than you need is not necessarily irrational behavior. Like other strategic situations, game theory helps us understand the social psychology of a person’s thinking in response to how other’s act. If you see others panic buy, your instinct is to buy the goods before the other person buys it. Each person’s optimal strategy is to beat the other guy to the paper towels or pasta package. That is represented by a Nash Equilibrium where each player has not incentive to deviate from their strategy. It is a no regret strategy given what they know about the situation. But the dreaded Nash Equilibrium in this case is sub-optimal for society. If enough people stockpile, the result are supply shortages and hefty prices. In 2020, we saw a demand surge for essential goods, masks, hand sanitizers, certain medicines, and various groceries. This demand run up of consumer goods, coupled with the economic lockdown of non-essential businesses, disrupted supply chains, which further put pressure on store supplies.

How do we stop panic buying?

There needs to be ways to counter people’s greed and fear. There’s social psychology, a belief that others are greedy. If that’s true, that incites panic buying, in order to not be the sucker (i.e. sucker’s payoff). That social psychology becomes a negative self-fulfilling prophecy that begets further hoarding.If everyone buys just what they need, there would not be shortages. These solutions could involve encouraging kinship, socially responsible behavior, explaining to people that this is a long-term game, signaling to shoppers that supplies are coming.

EConomics of Hospital Stockpiling

Large quantity purchases also caused supply shortages for healthcare front line workers. Masks, gloves, and respirators, which are personal protective equipment (PPE) for medical staff and hospitals, became scarce during Q1 2020. In the medical mask market, hospitals and states resorted to alternative channels to only find themselves competing against hucksters, profiteers, governments, and individual hoarders. Facing a global demand surge and scarce market, buyers faced the choice of acting as a good neighbor or panic buy. Just like customers in the stores, medical supply purchases do not want to be the sucker and miss out on supplies. There are reports of people stockpiling medical masks and selling it on the secondary market. That drove up prices which attracted copycats who sold poor quality medical masks. When official government guidance came out recommending mask wearing in public spaces, the general population went to alternative markets online and other shady networks, which exacerbated the problem but presented more opportunities for profiteers.

Solutions to Medical Supply Shortages

The motivation for stockpiling medical equipment is the same as collecting large quantities of household goods. However, countermeasures to the medical supply problem must be broader and forceful given the impact on the hospitals, doctors and people who are the nation’s first line of defense.

In a broken market with competing demands, one option is to rely on the federal government to serve as an efficient coordinator to purchase and manage distribution of supplies. The executive branch can invoke the National Defense Production Act to ramp up the manufacturing of masks, face shields, and other PPE. Historically, presidential administrations have used this authority to purchase critical military equipment to support infrastructure repairs and impacted citizens following natural disasters. In the same way, the government can leverage that authority to centralize supply management on strategic goods and services to deal with a global health pandemic. The government can deploy this policy strategy to fight a raging crisis by compelling private entities to produce medical supplies. When society is on a path to recovery, the same authority allows the government to guarantee purchases of the vaccine supply and manage its distribution.

For a broader crisis fighting strategy, strong leadership and communication to inform society and individuals. Hoarding behavior is rooted in panic and uncertainty about the future. That can be part of public health campaign to inform and address people’s doubt, fear and uncertainty. Private organizations also found creative ways to institute quotas on goods and services. For example, purchases of high demand products such as masks are subject to a cap per household. Stores used its soft power by posting signs that encourage customers to respect one another by not panic buying while maintaining a social distance from other shoppers.

TAKEAWAYS FOR FUTURE CRISES

With any crisis, decision-makers need to understand social psychology with empathy and putting themselves in people’s shoes. Game theory could be useful to understand how people make decisions in reaction to other people’s actions and what they see on the news. Once we understand how social psychology can break markets and worsen the crisis, governments and practitioners can use a combination of hard power like presidential authority and public health information campaigns to address the pain points so that our critical infrastructure and front line staff can continue to perform their duties to get society back to normal.

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