Panic and the Diversification Effect

A lot’s been written of late on the issue of panic buying and hoarding during the current Covid19 crisis. Most of it concerns why people are behaving in this way, but the reasons are pretty obvious. It’s just an inevitable response to our primitive Survival instincts being heightened as we see competition for resources apparently (if wrongly) intensify. A much more interesting question to me, however, and one that has received rather less attention is the issue of whatpeople panic buy. From hand-sanitisers to toilet rolls, the actual items being hoarded vary in how logical they are. So what’s going on here?

There are a lot of psychological factors that can explain what items people choose to hoard, so I wouldn’t wish to over-simplify things, but it occurs to me that there is one particular effect that has received little attention but could be quite important here.

The diversification effect (Read & Lowenstein, 1995) occurs when individuals are buying multiple items simultaneously to consume at a later date. We’ve probably all experienced this at different times, but common examples would include situations where we are buying things ready for a summer vacation or stocking up the home ready for the Christmas holidays. We have all found in circumstances such as these that we can get a little carried away and somehow we seem to end up with things that we never actually use.

As the name suggests, we are prone to the diversification effect when the items we are buying for future use are very varied. Scenes of emptying shelves in supermarkets in the media prompted many people to rush to the shops themselves and stock up on all sorts of things they “might need” if the crisis worsened or they were forced into a period of self-isolation. Some have argued it’s simply a herd mentality, but the clue that diversification is involved here lies in the nature of the items filling those shopping carts.

When the diversification effect takes hold, products purchased fall into two main categories. First there are the virtues, the things we should by such as healthy foods or everyday hygiene products. Then there are the vices, the “naughty treats” we allow ourselves for being good with our other purchases. These latter goods are rather like the slice of cake we allow ourselves as a reward for a good hour in the gym!

Sub-optimal behaviour under diversification leads to a curious mix of vices and virtues being purchased as we have a tendency to over-estimate our need for variety. What we are seeing now, however, is a rather more optimal form of diversification as supermarket sales data suggest we are buying far more virtues than we are vices. We are buying a greater variety of goods at present than we normally do, but most are very sensible practical things with just a few nice treats thrown in for good measure.

Put another way, our survival mechanisms are motivating us to gather extra resources and follow the herd, but the diversification effect is ensuring we broaden our horizons in terms of the range of products and brands we now consider and, by and large, we go for mainly very sensible goods with just a few random treats thrown in. This is why many of us are stocking up on toilet rolls and long-life milk, but few cases have been reported of consumers manically hoarding cream cakes and avocados!

Categories: Insights