Greg Ip on why safety can be dangerous

Greg Ip presented his new book Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe at Mercatus/GMU, with an emphasis on financial crises and a bit on forest fires too.  I was the moderator, and the commentators were Alex J. Pollock and Jared Bernstein.

The video and short summary is here.  My previous review of Greg’s book is here.

Comments

We live in a world where moral hazard exists, and where there is hyperbolic discounting of potential future bad events. So, erring on the side of safety may be just putting the thumb on an otherwise lopsided scale.

Moreover, having financial safety mechanisms in place, for example, may actually keep the herd from stampeding, and may enable a network of players engage in more productive activities than they would without such protections.

All this is to say that some of the arguments that safety rules cause risks ignores the world without them, or the improvement in productive capacity because of them.

And, it seems to me strange, that as we evolve in a more network economy, and as we understand more about networks and network failure, that we wouldn't take steps to protect the safety or oversight of hubs or critical connections. So, in effect, the meme of safety causes hazard may be looking a little retro as we better understand the matrix, fragility, and the potential for failure brought about by greater, not lesser, interdependence.

I didn't watch the video, but finished the book. I think the last chapter covers this side of counter-argument on safety-drives-us-crazy, with the introduction of Summer's comment that we wouldn't worry about safety and crashes if there weren't any airplanes invented.

'that we wouldn’t worry about safety and crashes if there weren’t any airplanes invented'

Really, someone actually wrote such a stupid thing? The insurance industry has always worried about safety and crashes, and their prevention. Maybe Sumner should read about what is often called the Plimsoll Line, and the history of safe ship loading in general -

'The first official loading regulations are thought to date back to maritime legislation originating with the kingdom of Crete in 2,500 BC when vessels were required to pass loading and maintenance inspections. Roman sea regulations also contained similar regulations.

In the Middle Ages the Venetian Republic,[3] the city of Genoa and the Hanseatic League required ships to show a load line. In the case of Venice this was a cross marked on the side of the ship,[4] and of Genoa three horizontal lines.

The first 19th century loading recommendations were introduced by Lloyd's Register of British and Foreign Shipping in 1835, following discussions among shipowners, shippers and underwriters. Lloyds recommended freeboards as a function of the depth of the hold (three inches per foot of depth). These recommendations, used extensively until 1880, became known as "Lloyd's Rule".

In the 1860s, after increased loss of ships due to overloading, a British MP, Samuel Plimsoll, took up the load line cause.' https://en.wikipedia.org/wiki/Plimsoll_line#History

The idea and implementation of watertight compartments for ships, to give one concrete example of an obsession with safety and preventing disasters, predates any safety concerns concerning airplanes - after all, no one in 1910 was concerned about safety in the as yet non-existent aviation industry.

Of course, considering that the only ships the U.S. builds these days are warships, he might not be aware of the sort of things that anyone living in a country with an actual commercial merchant fleet and commercial shipbuilding companies would be.

I don't think you understood

Here's a first for me: Yesterday the lender, not the buyer or the seller but the lender, in a mid-sized commercial real estate transaction requested that we postpone our closing until January because the lender has so many commercial real estate closings scheduled for December the lender can't handle the volume. What does this have to do with safety? Everything. Everything that's wrong with an economy that is fueled, and investors who are motivated, by speculation. Lately economists have been advising that "investment" has recovered from the depths of the Deep Recession. What they don't advise is that the "investment" is primarily in commercial real estate, and to a large extent the funds are coming from foreign investors seeking the "safety" of the U.S. market. And to think that only a couple of years ago lenders (and commercial real estate lawyers) had little to do because investors weren't interested in the risks of commercial real estate.

rayward that's not what this post is remotely about. You're becoming as unhinged as the E. Harding guy. At least when I post off topic it's something more interesting, like my pet monkey. It's so cute and human. It's some sort of Philippines species of Rhesus monkey but the more I look at it the more I think it's not Rhesus. It's adorable and will hold you hand, pick your ear hairs, groom your scalp, and act like a human child. It wants companionship and complains if you ignore it. I'm building it a bigger cage. Does stuff like try to unstick scotch tape ends that have folded over, like a human would do for fun. Tiny fingers and even tinier fingernails. How can anybody hunt and eat monkeys? It's like cannibalism.

When the herd runs to "safety", the herd creates the very risk it seeks to avoid. It's true that economists speak in abstract terms (how else?), while I experience real life in the real world of real business and finance, where the abstract is the reality. When the lender asks for postponement, my real world reaction is to impose conditions, including release of the deposit to the seller (my client) and for the buyer to post an additional deposit and to acknowledge that the only remaining condition to closing is delivery of the deed. How would you react? With monkeys?

What? You're losing the plot rayward. Monkeys is very important to my theme of 'safety', see the movie "12 Monkeys". As for following the 'herd' as a metaphor for unsafe behavior, you do realize the herd is the best source of protection from a prey? A zebra's stripes and all that. Analogously, when the Allies lost ships in WWII to Germany submarines, it was typically when they failed to travel in convoys.

Bonus trivia: I'm reading Sunstein et al's book "Nudge", which is a sort of behavioral economics themed book, very topical.

rayward, I'm interested (I retired and don't have access to surveys or real-life transactions) in commercial RE buy/borrow assumptions/estimates/forecasts/decisions. If you will, what discount rate and or capital rate did you employ? In the run-up to the recent unhappy RE bubble, commercial RE capitalizations rates dropped to unprecedented, low levels, which supported huge sale price rises. I saw deals in the hottest markets with prices based on cap rates as low as 4% to 5%, about what they could earn in an FDIC-insured bank account. .

Another aspect may be the buyer would need to pay in the remainder, if any, of the deal cash down payment

My practice is in a population growth area, so it's not the same as in many other parts of the U.S. (it's also not the same as in the northeast or SF Bay area). Rates of return have been so low for so long that investors have normalized them (i.e., accepted very low or negative cash flow) and substituted (irrational) expectations of future appreciation. It's insane! Early in my career I represented an industrial developer who purchased his land from the Indians (that's what his competitors would say), and he invested counter-cyclically: when others were buying, he was selling, when others were selling, he was buying. It smoothed out my income! One of my very good friends is a bankruptcy lawyer, who, you might imagine, was very busy during the early stages of the Great Recession. But in the past couple of years and now has little to do. Why? Little risk taken by investors. Of course, that's about to change, and change in what could be a dramatic way. Investors run with the herd. It reminds me of those videos of the migrating wildebeest in Africa, plunging into rivers filled with crocodiles.

..Hmmm, kinda of a slow holiday morning on MR, but may be a good time to mull over some informal guidelines for MR comments ??

On-topic commenting is generally a very good idea

Excessive comment postings are generally not a good idea

(any opinions on what "excessive" posting looks like to them here ?)
(everybody generally happy with the "regular" commenters here ?)

Ray Lopez, Is your pet monkey more interesting than your pet girlfriend?

The Fed was instituted in 1913 (same year as the income tax - coincidence, I think not) to provide emergency liquidity for banks and promised to repeal the business cycle.

Since the Fed genesis, the federal government added dozens of one, safety programs (FDIC, FSLIC); two, vehicles to provide liquidity (FHA, FHLB, FHLMC, GNMA, HUD, VA, etc.) to residential (including multi family rentals) RE; and three, consumer, civil rights faux fixes (CRA, Fair Lending, HMDA) without which the recent financial wreck could not have happened.

That's not good news for Nudge, neh? In his books - especially "Why Nudge" - Sunstein tends to glibly dismiss risk compensation and homeostasis, and both the learning and vigilance-incentivizing values of bearing the consequences of one's own ability to easily choose to do things that one might regret later. One interpretation of Ip is that trying to nudge us to help us be better off tends to encourage us to put our guard down. But a mature approach to life requires that one keep his shields up.

If both Ip and Sunstein can be selective in their storytelling, then perhaps they can both portray the world, or fractions of it.

After all it is a trivial observation that both self-correcting and anti-correcting systems exist.

I tried to watch this video but couldn't make it past the selective retelling of forest fire management. It is bad enough to make a glancing summary of 200 years history, but then to make an instant reduction that "such is the way our world works?" No.

The Great Fire of 1910, also occasionally referred to as the "Big Burn," is believed to be the largest single fire in recorded U.S. history. It burned more than 3 million acres in Idaho, Montana and Washington — in all, a total area roughly the size of Connecticut. There were 87 fatalities from the fire and 78 of those were firefighters.

The work Ip does making the world fit his narrative annoys me. Of course aggressive fire management would follow that kind of disaster. And no, there was no safety strategy that preceded and caused the Big Burn.

More drunk terrorists abusing opioids?

The idea that stability is dangerous seems to me to be a sort of broken window fallacy applied to risk. And we end up with policy makers who see low risk aversion as something to be fixed instead of something to be aimed for. FOMC members, in the midst of an unprecedented home building depression explicitly point to building as a sign of danger and wring their hands about investor confidence even while equity risk premiums are very high. It's proverbial bloodletting.

I have no objection to risk-seeking as a component of human behavior, or even as a sometimes-response to seeming safety. I only object to it as a unifying theme for the problem of risk, or as a political foil to prudence.

If you look at real work on the other side, like the British nudge unit, they don't make the corresponding claim that they have one rule to describe the world. They simply say they have tools that may work in certain circumstance. Even better, they apply those rules in cycles of test and measurement. What could be more fair?

So sure, Ip has hold of something, but for some reason he plays it up, either because his publishers wanted a big claim, or because he actually believes that a net reduction in automobile deaths are bad (net of all safety regulation, not cherry picking).

Boxing vs MMA and American Football vs Rugby also are good examples where 'safety' (equipment) probably make the sports more dangerous. Padding not only promotes less thoughtful risk taking, but also allows players to sustain repeated blows and keep going - short term damage is reduced, and instead we aggregate much larger long term consequences. Would you rather have a broken nose or Parkinson's?

Regarding American Football, I hear your argument, and think it has some validity, but I think it underestimates the effect of advances in athleticism and the ability to get bigger and stronger while maintaining speed. Football equipment has changed little in many decades, but players have gotten dramatically larger. I knew a guy who was a collegiate all-American candidate for a Rose Bowl winning school in the 1940's. He was an offensive guard/tackle. He weighed 202# and stood 5'11" when he played, and he was typically sized for a Division 1 elite team. A big hit in those days was a 210# guy slamming into a 180# guy. And yes, there were concussions, and fractured skulls, and broken jaws. It was far from safe, even when people tried to avoid head to face contact.

It's hard for me to imagine pro football with today's athletes, where half the players on the field are 300# and more (all the offensive and defensive linemen), and the average halfback or wide receiver is close to 200#, would be significantly safer with leather helmets and no face masks. The players are not only dramatically more massive (much taller too), but they are faster now. If you've ever played football, even at the slow speeds and small sizes of high school, you know that you are frequently out of control out there. It happens even when you're as thoughtful as you can be. The only way to make it safer would be to dramatically decrease the amount of legal contact, and then it's a different sport.

I also think further research will show that you're proposing a false choice between a lesser number of more severe head injuries (as happens with no helmets, where there are fewer severe head injuries, but it still happens with some regularity even if inadvertently) and lots of less severe injuries (as happens with helmets in football, or without helmets in soccer). I'm not sure there is a safe number of concussions, and football in the old leather-helmet days had plenty of concussions. And do you really think a professional MMA fighter is less likely to have long term cognitive effects than a professional boxer, assuming a similar length of career? Unless the MMA fighter is an incredible jujitsu master who finds a way to be unhittable, I think we only need another decade or two of MMA popularity to start seeing lots of punch drunk MMA retirees.

Like Ronda Rouse..... before her last fight.

There's another deep issue which is only hinted at in the video. Ip's slide showing the different outcomes in Thailand (with crashes) versus India.

There is no such thing as a risk free arrangement, nor a cost free risk mitigation. The clear example is "well, if there was NO flying in airplanes, there would be no airplane crashes, nor costs of airplane safety systems." And, as a result, everybody in the economy, including people who don't ever fly, would be poorer. And in fact, these poorer people would have the shorter life expectancies that come from being poorer. So in fact some level of deaths in airplane crashes may be lower total deaths than not having airplanes.

Similar issues constrain solutions to the "hyperbolic discounting" problem that Bernstein talks about. It's not just human pyschology. It's the real world limitations on choices. And so for example, the costs of things like carbon taxes may in fact actually outweigh any mitigation of effects, given that current consensus seems to be that those effects will go on for a long time (100s to 1000s of years) even if human CO2 emission goes to zero tomorrow.

We must always remember that one reason people do hyperbolic discounting is that they work and compete in their daily lives on a very very short term basis.

Hyperbolic discounting is not a rational decision, it comes out of the biology, and an evolutionary environment where extended planning was futile.

"We must always remember that one reason people do hyperbolic discounting is that they work and compete in their daily lives on a very very short term basis.

Obesity is essentially hyperbolic discounting, putting higher value on a full tummy than a trim waistline.

Should we approach more things that way, or less?

Extended planning past some horizon is still futile. To beat a very sore horse - the time scales of mitigation efforts and ill effects related to global warming are hundreds of years.
What scheme or mechanism of say 1815 is still in use today? What political borders are the same? Even such long lived things as the constitution of the United States and the rate of participation in Churches has changed wildly.

As for obesity, after decades of watching the debates about it, I now conclude that there's something or something(s) in the environment that are driving it. It's not about hyperbolic discounting so much as a change in the environment. (See for example the papers noting various mammals are getting heavier. Last I checked moles and rabbits weren't eating fast food or drinking soda...)

Does Greg Ip wear a seatbelt.

Purchase house insurance.

Does he insist that his kids wear a helmet when they ride a bike.

I confess I have not read the book, but how is this not a rehash of Nassim Taleb's ideas?

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