Heuristics in Policymaking: It’s Time to Figure Out What Drives Policy Uncertainty

Policymaking under the pandemic pressure could be subject to cognitive heuristics, allowing the resulting policy uncertainty to influence the market negatively.Researches in economics and finance have long recognized the importance of policy uncertainty. However, most studies take policy uncertainty as a given while focusing on its real or financial influences. The few studies exploring the economic sources of policy uncertainty often attribute it to some sort of external uncertainty faced by the government in making policies.The coronavirus pandemic of 2020 tells a different story. Its influence on the stock market is unpreceded (Baker et al. 2020, Fetzer et al. 2020). Conditioning on the same uncertainty of the pandemic, however, governments across the world formulate and announce different policies. The drastically different real and financial impacts of such policies remind us that policy uncertainty could directly originate from the decision process of policymakers. It is time to figure out what drives policy uncertainty and how to optimize policymaking under crisis.