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The Economy

Perception is Reality: Part I

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August 12, 2020 

How you manage your customers' perception of risk will determine your success in rebuilding lost revenue streams.

What's a boy to do? I have variously been told that:

  • I need to wear a mask at all times, in the house and out;

  • the virus will magically disappear;

  • we are in an economic downturn much greater than the Great Depression;

  • we will have a rocket ship recovery.

Some political groupings are encouraging me to go out and consume for the good of my fellow-countrymen and women (and also their own chances of re-election); others precisely the reverse, and, oddly enough, for the exact same reasons. It's all very confusing- what is a boy to do? And then, I remembered: I am not a boy; I am a middle-aged (ahem) man. When I was a child, I reasoned like a child; now I am a man, I guess I am supposed to reason like a man, and make my own decisions, based on the conflicting data and pressures around me.


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In fact, I have been doing this already for much of my life - making my own decisions - most of which have turned out OK, and none so far have been terminal. The same as everyone else - making decisions based on perceived risk and benefit. I fly (flew) but don't bungee jump; I go on bike rides but never a motor cycle. Whether these judgments are right or wrong for other people, they are the trade-offs I make with my set of values and perceptions. The human animal is reasonably well-equipped to make judgments about Actual Risk, based on Perceived Risk - at least, that is what Darwin taught us. Sooner or later, Perceived Risk approaches Actual Risk, but the journey can be expensive (turns out I am right to avoid a motor cycle).

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Today's Perceived Risk is high; what is hard to assess is the Actual Risk we run from COVID-19; not least because our understanding of the virus is still evolving, as is the virus itself. Also, a further confounding effect is which particular media bubble we live, each of which has its own commercial interests in promoting fear, either of re-opening or not. There are two steps to be considered when looking at Actual Risk - what is the chance I will catch it; and what is the chance it will kill me once I have it.

The likelihood I will get infected obviously depends on the degree to which I expose myself to other people. The rate at which the virus spreads (as we all now know) is the Effective Reproduction Number - Rt. At an Rt of less than 1.0, the virus will eventually peter out as it finds an ever-reducing number of hosts.

At the start of the year, before we became aware of the presence of the virus, the reproduction rate was in the mid 2's and it was rampaging through the affected states; it fell below the magical 1.0 at great economic cost in the depths of the lock-downs, and has now ticked up above 1.0 again as we venture out of our foxholes. By comparison, the reproduction rate of Spanish Flu in 1918 was 1.8, and the everyday seasonal flu is around 1.28.

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I wanted to test whether the much debated Red State Blue State divide has any basis in fact. The data above (which are simple averages) would not indicate any significant difference in the Effective Reproduction Number between states that voted Republican in the 2016 Presidential Election and those that voted Democratic, supporting a view that most folk take similar decisions on risk, notwithstanding the tub-thumping in the different media.

Now, what is the risk that, once I catch the virus, it will kill me. That seems to depend on a host of variables, including age, gender, ethnicity, poverty and preexisting conditions. The CDC publishes a regular update on the number of fatalities attributed to COVID-19 which, combined with the most recent census, allows us to deduce the mortality rates by age and gender associated with COVID-19 (per 100,000 and annualized based on February to July data):

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To place that in context, the risk of dying from COVID-19 is trivial in childhood and, while meaningful in adulthood, is far exceeded by accidents, homicides and suicides. However, it rises to become the third cause of death for those above 55 years of age, exceeded only by heart disease and cancers. With an annualized death rate of 283,000 based on year to date, COVID-19 is set to jump into third place as the cause of US deaths in 2020 (based on 2018 mortality data). Of course, it is to be hoped and expected that the rate will decline, as more cautious behaviors, better treatment and, eventually, a vaccine or therapeutics fight back the toll. Either way, it will still place third.

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People are generally rational, and they follow their rational interests. We shouldn't be surprised that younger people seem less concerned about COVID-19: they already run a relatively low risk of mortality, and COVID-19 is not a great threat to them in relative terms, although it still looks as though it will be the fifth greatest contributor to mortality in that cohort. Young people are supposed to be more optimistic; if they weren't it would be a poor lookout for us all - they are programmed to socialize, if only so the human race can continue. There is only so long that those normal interests will be subordinated to wider social pressures to remain distant.

What do I take from this? That older people, as well as people with underlying conditions are right to take reasonable precautions to ensure their own well-being, but that expecting less at-risk individuals to behave in the same way is not realistic - they have an absolutely lower risk. Children, especially, have an extremely low risk but are bearing a high price in the suspension of education and the other activities that are necessary to making their way in life. That is not to say that less-exposed individuals do not have a vicarious sense of obligation on behalf of their older relatives and the wider society in which they live. However, at the margin, the lifestyle that they lead will differ from others. Just like I don't ride a motor cycle, and my son does.

In considering measures to recover their businesses, managers need to consider the demographics of their customer base and balance that with the perception that they are being a responsible corporate citizen in looking out for the well-being of all their constituents. The human animal has a well-established evolutionary risk aversion which leads us to avoid situations where we have a perception of risk, whether that risk is real or not. Not an easy needle to thread, but erring on the side of caution and providing multiple layers of confidence-building precautions will provide greater consistency and a steadier path to economic recovery. Confidence is a fragile commodity, and rebuilding it as we emerge from the lock-downs requires prudent, careful, responsible and, above all, consistent steps.

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Although Perceived Risk eventually approaches Actual Risk, we don’t know when the two will converge. In the meantime, Perceived Risk is high and businesses need to address this perception given there are still so many unknowns and conflicting messages out there. Consumer attitudes toward various brands have changed and much of this has to do with the fact that perception of risk is now a bigger factor. Brands need to continue to retain and grow their relationships with their customers by taking all steps to reassure them that the products and services are being provided safely: often technology can help (digital communications, marketing, ordering and commerce); but physical reassurances are also important.    In a few weeks, Amy Anderson will publish an Insight which will explores the many ways companies should be addressing Perceived Risk to accelerate its convergence with Real Risk, to foster deeper relationships with customers, and set businesses back on a consistent road to recurring and reliable revenues. 

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