Real options and social distancing
I missed this when it first came out:
We think that the debate regarding extreme social distancing has a clear verdict — it is imperative that we should engage in this social distancing (shelter in place for all but essential workers) at least for the foreseeable short-term, but for reasons that both sides have missed.
Our country does not need to decide today whether it is worth shutting down the economy for a prolonged period to protect against coronavirus. Instead, we only need to decide what to do for now. And for now, the health benefits of extreme social distancing clearly exceed the costs to the economy regardless of your chosen economic model. To understand this, it is critical to appreciate the concept of real options.
The application of real options to social distancing was written 2.5 weeks ago so I would hope someone in the White House has read it. But will they understand the basic concept?
“A simple financial model showed the company’s managers how to price blocks at their option value over five years, incorporating uncertainty about the size of the reserve and oil prices and leaving room for a flexible response to the outcome. The managers reevaluated the company’s portfolio, and instead of letting blocks go for a notional amount, they decided to hold on to those with high option value and to sell or trade the rest at their revised worth. This case builds on the model developed for financial options by Fischer Black and Myron Scholes as modified by Robert Merton, and specifically on the observation by Stewart Myers of the Massachusetts Institute of Technology that Black-Scholes could be used to value investment opportunities in real markets—the markets for products and services.”
Black-Scholes is taught at Wharton and I’m sure a lot of the finance students know who Stewart Myers is. But Trump was not exactly one of the brighter Wharton students. And I can guarantee you that his chief “economist” Lawrence Kudlow understands even the basics – let alone this application.
In a country with Gilded Age level of inequality implementing any meaningful social distancing is next to impossible. Ghettos prevents that and became permanent hotspots. See discussion of this problem at
IMHO the number of deaths from COVID-19 in the category “younger then 55” in a given country correlated well with the level of obesity. In other words the virus hits already deprive and weakened underclass — the main consumer of junk food. .
So what we see in the USA is far from surprising taking into account the level of neoliberalization of the country and a large permanent uninsured underclass including contractors and perma-temps.
Existence of nursing homes is another unsolvable problem. Like ships, they also automatically became hotspots and medical personnel involved became inflected spreading the infection in the vicinity.
Here is one interesting comment that I found:
A short cut in the model.
We know that some 60,000 people less will die during a recession. Go look up that stat, I forget where I read it.
Without specifying causality, let us call the that constant risk of a full economy that some 300 million are willing to pay. We can see that we have reached the risk level. The lock downs are voluntary at this point if I assume causality.
A funny use of big words you have no clue what they mean in reality. What family of monkeys helped Matty Boy with his latest gibberish?
Have they shut down the economy? The poorly paid, that is, essential, workers haven’t noticed a shutdown, neither have those in a medical profession. It’s probably an illusion one sees when one looks at the economy in terms of one’s Q3 bonus or the next take over and liquidate option. Otherwise, for most Americans, the economy shut down in 1981 when Reagan came into office.
Austin says the value/cost of a human life is $2 million. In 2012, the U.S. Office of Management and Budget put the value of a human life in the range of $7 million to $9 million.
Lets assume the person does not die as many older people probably would from COVID. Instead, they damage their lungs severely from not practicing social distancing or wearing a mask. One 28 year female athlete was in such a a case from COVID. I am going to assume the cost goes up due to the healthcare.
I believe Austin underestimates the value.
Just fill a syringe with Lysol, it will be fine
The “value of life” typically gets applied on fractional lives. There is a pretty strong old age discount applied. Further, COVID killing 100 people is not really saying an extra 100 people died. Not sure it is a great idea to get McKinsey or whoever studying the cost/benefit of stopping a pandemic that is really great at shrinking nursing home populations.