January 6, 2005

A Cold-Blooded But Fascinating Look at Risk

Richard Posner, judge and thinker on the application of economics to everyday life, analyzes the economics of rare but large-scale disaster.

It seems a bit cold-blooded, but illustrates a rational, as opposed to purely emotional, means to allocate resources to risk-prevention and risk-mitigation. One of the building-blocks of the analysis is how much a life is worth (in the U.S., so they say, $ 7,000,000 on average). Juries make this analysis all the time, because in wrongful death cases, someone has to. It's not a judgment of the moral worth of a life, where "he who destroys a life destroys a whole world."

Posner also explains the disincentive for politicians to expend public funds on this type of project:

There are a number of reasons for such neglect. First, although a once-in-a-century event is as likely to occur at the beginning of the century as at any other time, it is much less likely to occur in the first decade of the century than later. Politicians with limited terms of office and thus foreshortened political horizons are likely to discount low-risk disaster possibilities, since the risk of damage to their careers from failing to take precautionary measures is truncated. Second, to the extent that effective precautions require governmental action, the fact that government is a centralized system of control makes it difficult for officials to respond to the full spectrum of possible risks against which cost-justified measures might be taken. The officials, given the variety of matters to which they must attend, are likely to have a high threshold of attention below which risks are simply ignored. Third, where risks are regional or global rather than local, many national governments, especially in the poorer and smaller countries, may drag their heels in the hope of taking a free ride on the larger and richer countries. Knowing this, the latter countries may be reluctant to take precautionary measures and by doing so reward and thus encourage free riding. Fourth, countries are poor often because of weak, inefficient, or corrupt government, characteristics that may disable poor nations from taking cost-justified precautions. Fifth, people have difficulty thinking in terms of probabilities, especially very low probabilities, which they tend therefore to write off. This weakens political support for incurring the costs of taking precautionary measures against low-probability disasters.

An interesting piece with interesting comments. I don't usually think along these lines. Maybe I should.

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