Lebanon economy

Fixing Lebanon’s compounding financial crisis with neuro-economics

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As the Lebanese economy plunged into an all-encompassing crisis in 2019 following years of neglect, corruption, and mismanagement in government, one economist has claimed that applying the theories of a new science field could address the financial issues.

Dr. Hilda Kammoun, an author and specialist in neuro-economics told Al Arabiya English that this area of research bridges economics, psychology, and neuroscience.

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According to her, people differ from the standard economics concept of rationality both in the way they make judgments and how they make choices. “Neuroscience is tailored to understand the psychology and biology of the thoughts/feelings behind saving, investing, and trading,” she said.

This area of science creates predictive models of investor behavior and designs the correct practices to constrain policies that may lead to herd behavior and ultimately bubbles and crashes, she explained.

“To choose rationally under risk and uncertainty, we make scenarios to organize them in decision hierarchy, calculate the expected benefit of each, and choose the most important,” Kammoun said. Loss aversion is a key aspect in the financial decisions people make.

“Many studies talk about how neuro-financial principles can help us drive our finance with revision and adaptation to different scenarios, especially during financial crises, or at the very least it helps in adjusting one’s repetitive decision-making contexts,” she explained.

To Kammoun, understanding the importance of repetitive stress, biases, mood, tendency to believe in earning calls is essential, along with understanding a person’s attitude to risk based on the size of reward that makes it worthwhile.

When it comes to understanding how and why biases arise and how they affect social dynamics to develop efficient organizational structures, Kammoun explained that by knowing the risk-reward relations, the biases which differ significantly, a person or an organization can restructure so that employees are given the tasks most effective to them given their skills.

Widening the parameters of neuro-economics away from the individual and into the realm of government economic policy, shows the outcome of the theories applied are similar, she said.

Demonstrators take part in protests near the site of the blast at the Beirut's port area, Lebanon Aug. 11, 2020. (File photo: Reuters)
Demonstrators take part in protests near the site of the blast at the Beirut's port area, Lebanon Aug. 11, 2020. (File photo: Reuters)

While the escalating financial crisis in Lebanon resembles a full-fledged crash, fingers are constantly pointed at lax regulations, malicious bankers, and morally bankrupt politicians.

Although these are the essential elements, as time passes other elements come into play.

As Lebanon’s financial crisis continues to unfold how much will the psychology of the politicians and the governors of the economy affect their actions, aspirations, cognition, emotions, culture, and perception of fairness bear on their future decisions?

After nearly a century of separation between economics and psychology, behavioral and neuro-economics are the new fields attempting to bring fresh insights into economic discourse.

Following Lebanon’s financial crisis that highlighted the inadequacy of traditional economic instruments, behavioral experts have become necessary.

“Neuro-economics allows scholars to better understand the motivations behind certain types of behavior, and the process by which decisions are made,” Omar Al-Ubaydli, an economist at George Mason University told Al Arabiya English.

Ubaydli noted that research demonstrated that corrupt behavior requires more mental exertion than honest behavior, “and so one way to decrease the likelihood of corrupt behavior is to make people make decisions while they are multitasking, as they will be less likely to summon the resources needed to behave dishonestly,” Ubaydli said.

Where is Lebanon now?

With the highest debt-to-GDP ratio in the world that stands at a staggering $93.4 billion, it is also estimated that more than $15 billion has been squandered in Lebanon between governmental negligence and institutional inefficiency.

Lebanon may be in a $100 billion hole, and this is without public infrastructure and other needs. For context, the IMF’s largest-ever bailout was $57 billion for Argentina in 2018.

According to Beirut-based research and consulting firm, International Information, Lebanon has seen average wages fall by 84 percent over the last 12 months. In light of the collapse of the Lebanese pound to the dollar, the company's data now shows that Lebanon ranks amongst the top ten countries in the world with the lowest minimum wage. This group includes other nations such as Afghanistan, Yemen, and Ethiopia.

The accelerating economic downfall in Lebanon and the consequent collapsing currency put essential food items beyond the reach of many. Inflation triggered a 400 percent price hike on food items in just one year, and the consumer price index jumped 158 percent between March 2020 and March 2021.

Lebanon has been without a government since August 2020 due to politicians refusing to compromise on forming a new Cabinet that could pave the way for reforms and recovery. Violence on the streets and sectarian strife are on the rise.

Neuro-economics reveals some surprising findings that could help investors make better decisions and hopefully help Lebanese people – including those in government - introduce policies and make better decisions to address their current plight.

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