Fear, panic and ignorance can affect human ability to make rational and logical decisions in times of crises – and this phenomenon is not limited to investment markets, as the Cape Town water crisis has taught us. Whether a severe drought, Steinhoff collapse or unexpected Super Bowl win, we humans have the propensity to react in a manner that often defies logic. Behavioural finance has some lessons to teach us about how we respond in times of crisis, and that a shortage of water should not result in a shortage of common sense. Here’s what we’ve learnt:
Have a plan
Human behaviour leading up to the implementation of level 6b water restrictions in many regards mimics general attitude towards saving for retirement. With level 2 water restrictions having been implemented in December 2015, Capetonians were well aware of the looming crisis and yet 60% of residents still chose to do nothing about it. The fact that only 4% of South Africans can afford to retire means that the remaining 96% are not saving – in spite of a 45-year advance warning. If we compare this water crisis with a recession, it is true to say that both are notoriously difficult to predict, but it is possible to heed the warning signs and act accordingly. Delay in taking proactive steps to harvest and access alternative water sources has cost many residents dearly. In the 26 months since water restrictions were first implemented, the costs of water tanks and boreholes have escalated dramatically, with demand way outstripping supply. As in the case of investing for the long-term, delay can be expensive. Many Capetonians, who at their own expense and using after-tax money spent two years investing in water-saving and water-harvesting initiatives, are now reaping the rewards of their planning.
Know your time horizon
As with investing, understanding one’s timeline is the starting point of all decision-making. Do you simply want enough water for tomorrow, or is your aim to secure a guaranteed supply of water for the rest of your life? Taking steps to ensure enough water for tomorrow results in knee-jerk reactions and piece-meal solutions. Careful planning for a sustainable supply of water to your home for the long-term requires thought, analysis and consultation with plumbing, borehole and water experts. Western Cape droughts are far from uncommon, and water remains as it always has been – a scarce and valuable resource. Mass-purchasing bottled water online and standing in queues at the Newlands spring are not sustainable solutions for one’s long-term water requirements.
Beware of investment scams and ‘get-rich-quickly’ schemes
In tough economic times, Ponzi and pyramid schemes tend to rear their audacious heads as people find themselves desperate for cash. So it is, too, in the case of water. It is anyone’s guess how many con-artists are making a quick buck selling water to panicked Capetonians. After a cursory glance at the recently published list of Cape Town’s top 100 water users – with the top consumer using 702 000 litres per month – it is not difficult to conceive that some of the culprits have been selling their municipal water to residents too scared to use their own.
As with personal wealth, becoming ‘water rich’ takes both time and intentional planning. Knee-jerk reactions in this period of water crisis can be likened to the ‘get rich quick’ schemes that continue to plague the investment industry. A ‘get water quick’ mentality has resulted in many residents spending time and money on risky, short-term bets rather than investing in sound, long-term solutions such as water-harvesting, installing eco-shower heads, treating underground water, installing backwash tanks for swimming pools, securing pool covers, developing grey water systems and converting to indigenous gardens. These are proven, sustainable solutions with guaranteed returns on investment.
If the recent collapse of Steinhoff has taught us anything, it is the overriding need for diversification in our investment portfolios. Similarly, diversifying our reliance on water is essential to ensuring ongoing, sustainable supplies of water into the future. Knowing that water is a valuable, essential and scarce resource, it makes perfect sense to invest in securing alternative water sources such as groundwater, harvested rain water and grey water systems to supplement the tenuous municipal flow. If nothing else, load-shedding schooled us all in the need for energy diversification as we invested in generators, solar solutions and off-the-grid alternatives. Being water diverse will make us so much more resilient to future droughts, climate change and political interference in service delivery.
Sadly, ignorance and a lack of appreciation for facts can lead people to make irrational decisions, with absolutely no one being exempt from this – the planned points of water distribution in the event of a Day Zero being a case in point. Sygnia’s CEO, Magda Wierzycka, has been particularly outspoken in challenging the logistics of getting 4 million panicked people, most of whom cannot lift 25 kilograms let alone carry it, to 200 distribution points every day in a city whose central train line is not operational and whose public transport system is nothing short of grossly inefficient. Ignorance as to the vastness of our oceans and the source of water for desalination purposes resulted in a well-meaning resident being taken to task on social media for filling up a few containers with sea water. Presumably he intended to top up his salt-water swimming pool thereby alleviating the burden on the municipal water supply only to be lambasted online by over-zealous keyboard warriors. So, too, does the void of facts and absence of information about crypto-currencies make way for unrivalled displays of ignorance and overnight experts in everything.
Fear and fake news
Fake news and misinformation play a significant role in raising levels of panic and ignorance. Recently, a pair of want-to-be-vloggers contributed to the already unbearable levels of public misinformation by posting a largely factually-incorrect video which accused Western Cape farmers of siphoning off our water and spewing unsubstantiated facts as to how many litres of water it takes to make a burger patty – as if vegetables and fruit are irrigated with star dust. Similarly, many Capetonians took to social media and online petitioning to protest against an allegedly proposed set of water bylaws that included obtaining plans for one’s water tanks and replacing all toilet cisterns with smaller units. Market speculation – as opposed to long-term investing – is a breeding ground for fear mongers and fake news which tempt nervous would-be investors to make irrational decisions driven by alarm.
Panic, greed and stubbornness
Stubbornness, greed and panic are common mistakes made by investors – often to the detriment of their long-term savings. In the context of this water crisis, it is interesting to note that many Capetonians refused to save water out of sheer anger toward those in charge. Many residents stubbornly refused to initiate water-saving on the basis that the crisis was created by somebody other than themselves. Although it is plausible to assume that the fault lies somewhere between local and national governments, digging one’s heels in does not solve the water crisis. Now that the reality of a possible Day Zero has sunk in, we have evidenced panic and greed in spectacular fashion. Appeals to residents to resist panic and exercise restrain when purchasing water have in many instances fallen on deaf ears, if the reports of stampedes at major retail outlets are anything to go by.
Water experts and climatologists have been cautioning politicians for decades about the impending water crisis, and yet few politicians heeded the advice. In the world of investing, this is referred to investor over-confidence – over-estimating one’s own knowledge in relation to others. By all accounts if our politicians had listened and acted upon the advice of the experts two decades ago, Cape Town would not be in this predicament. Over-confident investors have long been ignoring the cautionary advice of investment experts on the dangers of crypto-currency. The result of this over-confidence, coupled with herding and FOMO, is currently playing out in the Bitcoin market. In turn, over-confidence gives rise to overnight experts in everything from bottled water to climate change, leading to a vicious cycle of panic and fear.
A humanitarian crisis such as this is not all doom and gloom. In the wake of Steinhoff, there is a tendency for investors to ask more questions, better understand the construction of their investment portfolios and seek independent professional advice. Our water crisis will no doubt be a harbinger for entrepreneurship, design and breaking new ground, as it were, as we seek to embrace a whole new water economy. And lastly, the water shortage has forced (most) of us to examine our past water consumption and to adjust the way we treat this precious resource. We have learnt how little we actually know about something as seemingly simple as water, and how important it is to save for a non-rainy day.
Have a super Wednesday.
Categories: Financial Planning