Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe
Here are my key takeaways:
- The steps we take to ensure our safety may actually make us unsafe. Putting out small forest fires sets the stage for larger ones; allowing underbrush (kindling) to grow thicker and more dense.
Believing that levies would protect New Orleans from hurricanes, the city became increasingly populated until one day a hurricane breached those levies and caused catastrophic damage and loss of human life.
Antibiotics save millions of lives while simultaneously inducing the evolution of deadly superbugs.
- “Moral hazard” is the idea that when people are protected from the consequences of risky behavior, they take more risks. People are less conscientious with property that is insured; football players feel freer to hit each other much harder when wearing helmets; cars equipped with anti-lock brakes encourage reckless driving.
(Here’s an interesting distinction. Studies conclude that seat belts reduce traffic fatalities because they don’t “encourage” people to drive recklessly; no one wants to get into an accident, even if they believe that a seat belt makes them more likely to survive.
In contrast, the presence of antilock brakes leads many drivers to believe they are less likely to crash, and thus it encourages higher-risk driving. So while antilock brakes still offer a net positive benefit, some of that benefit is offset by some riskier behavior.)
The same traits which generally make a city generally safer for a given individual — for example, that emergency responder resources can be allocated more efficiently — also make them more dangerous to the collective in the event of large-scale disaster. The same can be said of insurance; any individual risk is safely absorbed by the aggregate, which simultaneously increases the exposure of the aggregate to major loss.
- There is a constant tension between “engineers” and “ecologists”. “Engineers” try to make the world safer through design; “ecologists” argue that such efforts often pack unintended consequences, causing more problems than they solve. Governments are tasked with striking a balance between “hands-on” and hands-off.
- The notion that the economy can be “managed” is actually relatively new. Microeconomics predicts that as demand for a particular commodity increases, so shall its price; the reverse is also true. Unfortunately, the broader economy does not self-regulate in this fashion; government intervention can make things much better or much worse.
- Catastrophic events — particularly within complex systems like economies or weather patterns — are fundamentally unpredictable; yet we behave as if they can be anticipated. When something bad happens — a natural disaster, an economic crisis — we react. We attempt to reverse engineer what went wrong and take action to avoid making the same mistake. The problem is that the next crisis seldom looks like the last one. We invent and rely upon models which can’t adequately account for unknown or under-estimated variables.
Life insurance works because policy holders typically don’t all die at once; the risk to the insurer is uncorrelated. However, in finance, risks are often correlated but in ways which may not be obvious until the dominos have already begun to fall.
(On the topic of weather, an interesting side note: climate change is blamed for increasingly devastating natural disasters, although it may be more accurate to say that disasters are becoming more expensive simply because more people are clustered in harms way.)
- Efforts to control risk often result in merely shifting that risk elsewhere. When regulators cracked down on banks lending practices, banks effectively transferred this risk to newer, less regulated markets.
Mortgage-backed securities (MBS) — widely regarded to have played a major role in the 2008 crisis — were actually created to reduce risk in regional housing markets; the unintended consequence was that they reduced the costs of borrowing and prompted an aggregate surge of high-risk lending.
A doctor prescribing antibiotics must weigh the immediate and visible benefit (stopping an inconvenient or dangerous illness) against the potential distant and intangible consequence (transmission of an increasingly antibiotic-resistant bacteria to someone else).
- Measures to reduce market volatility actually make the market more volatile. For decades, the Fed sought to keep inflation low which resulted in a period of relative stability; reducing the frequency and effect of recessions. However, as a result, homebuyers and investors were gradually induced to both spend more frivolously and pay more for assets, increasing their exposure to big losses if and when things went sideways.
The adoption of the gold standard in the 1800s was intended to spur international trade by reducing risk of currency depreciation to lenders; however, it amplified risk of default and caused imbalances in trade. (We see similar issues with the Euro now.)
Banks, stocks, options, index funds, MBS … all were created as a means to pool (distribute) risk, making it safer for individuals to invest, but paradoxically increasing everyone’s exposure to a major event.
- When things do go wrong, we often overreact and make it worse. Human beings crave certainty; we will go to irrational lengths to protect ourselves from unlikely but scary outcomes.
By way of example, there is an important parallel in the food industry; whenever it’s known (or suspected) that even a small percentage of a particular product is contaminated, consumers throw it out. Consider the recent food-poisioning scare at Chipotle. I’m not making light of the fact that hundreds of people were afflicted, but objectively, Chipotle serves well over half a million people each day; the actual risk of food poisoning was incredibly low. Yet consumers abandoned Chipotle in droves; sales fell off by 30% and months later, Chipotle is still recovering.
We saw similar panic in the financial crisis of 2008 (and in many smaller market crashes). An index which tracked the price of AAA-rated MBSs at the height of the crisis estimated that these MBS had lost between 40-80% of their value, yet by 2010 they had recovered to nearly 100% of their value. This suggests that the selloff was largely irrational and driven by fear.
- Fear is a double-edged sword; prompting us to avoid foolish risks which may hurt us, but also preventing us from taking risks which may help us. Sometimes it’s easy to know the difference, but often, it’s not. Unshakeable confidence is the defining characteristic of both unrepentant failures and our most spectacular success stories. Failed businesses typically harm only their shareholders and employees; the greatest pioneers advance the entire human race. As Mark Twain so eloquently put it, “progress depends on the unreasonable man.”
One example is nuclear power; generally speaking, it is the most efficient, least costly and yes, safest per gigawatt form of energy known today. Yet it is widely shunned, in favor of alternative sources which eventually cause far more death by way of pollution, because in rare instances nuclear power yields catastrophic meltdowns.
- Safety lulls us into a false sense of security. We learn through experience, but our experiences can deceive us. We do dumb things — driving while “tipsy”, hooking up with strangers, leaving our valuables in plain sight — and when nothing bad happens, we “learn” that these behaviors are “safe”. Until one day, they’re not.
Even in places where calamity is comparatively likely — for example, risk of devastating earthquakes in California, hurricanes along the Gulf Coast, or tornadoes in Central Oklahoma — such events are sufficiently infrequent so as to foster the expectation that they will not happen to me, the individual living there.
A personal example: one year in college, my roommates regularly left our apartment door unlocked because we lived on a “safe” campus. This belief held true until finally one night, someone walked through that unlocked door while we slept, helped themselves and walked out with hundreds of dollars worth of my possessions. A foolish behavior was proven “safe” by experience … until one day it wasn’t.
(This is also a topic discussed in the Black Swan.)
There are other challenges in our quest for safety, all of them fundamental to our human nature. For example, we are generally willing to limit the behavior of other people, but less so ourselves; it’s always easier to blame someone else than to look in the mirror. Safety almost always comes at the cost of freedom and most opponents to such rules (gun control, marijuana, use of cell phones while driving, etc.) will invoke freedom as their defense.
In the end, the pursuit of safety is worthwhile and usually effective; particularly when it does not cause offsetting consequences, the likes of which I’ve described above. Foolproof is a great and thought-provoking book. As someone who struggles at times with anxiety, I feel like it also helps me to develop a clearer picture of what I can do to enhance the safety of myself and those I love, without wasting mental energy on things I can’t hope to control.