Panic buying knows no borders.
This panic buying is the result of the fear of missing out. It’s a phenomenon of consumer behaviour similar to what happens when there is a run on banks.
A bank run occurs when depositors of a bank withdraw cash because they believe it might collapse. What we’re seeing now is a toilet-paper run.
A bank holds only a fraction of its deposits as cash reserves. This practice is known as “fractional-reserve banking”. It lends out as much of its deposits as it can – subject to a banking regulator’s capital-adequacy requirements – making a profit from the interest it charges.
If every customer simultaneously decided to withdraw all of their deposits, the bank would crumble under the liability.
Why, then, do we not normally observe bank runs? Or toilet paper runs?
The answer comes from Nobel-winning economist John Nash (played by Russell Crowe in the 2001 movie A Beautiful Mind). Nash shared the Nobel prize in economics for his insights in game theory, notably the existence of what is now called a “Nash equilibrium” in “games”.
Both banking and the toilet-paper market can be thought of as a “coordination game”. There are two players – you and everyone else. There are two strategies – panic buy or act normally. Each strategy has an associated pay-off.
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