Sunday, June 29, 2014

Considering these events in isolation can lead to policies that are far from optimal


An interesting issue which is too rarely engaged with and an interesting discussion. How much risk mitigation can we afford? From How many catastrophes can we avert? by Tyler Cowen. from the originally cited paper.
How should we evaluate public policies or projects to avert or reduce the likelihood of a catastrophic event? Examples might include a greenhouse gas abatement policy to avert a climate change catastrophe, investments in vaccine technologies that would help respond to a “mega-virus,” or the construction of levees to avert major flooding. A policy to avert a particular catastrophe considered in isolation might be evaluated in a cost-bene fit framework. But because society faces multiple potential catastrophes, simple cost-bene fit analysis breaks down: Even if the benefi t of averting each one exceeds the cost, we should not avert all of them. We explore the policy interdependence of catastrophic events, and show that considering these events in isolation can lead to policies that are far from optimal. We develop a rule for determining which events should be averted and which should not.
Risk identification, risk quantification, uncertainty, risk mitigation, present vs. future trade-offs, consumption vs. investment trade-offs, tactical vs. strategic trade-offs. It's all there, bundled up.

There has been, among advocacy groups, an orientation towards the precautionary principle, a quite flawed risk approach, over the past couple of decades. While at its heart, there is a commonsense nugget that you shouldn't do anything rash and without some degree of confidence on the outcomes, it is in practice a disgraceful exercise in reductio ad absurdum whereby no action can take place without the authorization of some preferred group, just in case the action might have an unanticipated negative consequence.

Cowen's post and the original work begin to map some of the boundaries to how one can and ought to make communal risk/uncertainty decisions. Only so much of a society's surplus can be diverted into crony capitalism, non-productive consumption, and moral hazard before the productivity of the system is undermined. So how do you assess real but remote events that have large magnitude consequences. How do you make trade-off decisions?

These are the sorts of issues that Nassim Nicholas Taleb is wrestling with in Antifragile: Things That Gain from Disorder. Part of his answer is that there are some events that you cannot actually plan for, all you can do is prepare your system in such a way that if the highly unlikely event does occur, you can recover as painlessly as possible.

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