Tuesday, June 10, 2008

Taking More Risks

Taking More Risks Because You Feel Safe
Or, Why The Government Bailout Of Homeowners And Bankers Assures That 'Next Time' Will Be Worse!

By Shankar Vedantam, WP | 10 June 2008

Prudent bicyclists wear helmets,
but motorists who see the helmets
may drive less prudently around
those cyclists.
(Photo by Susan Biddle)

The housing market is in free fall: Quick— let's protect homeowners against foreclosure.
The country is in recession:
Quick— let's give Americans money to spend to restart the economy.
Big Wall Street firms and banks are failing:
Quick— let's bail out businesses that are "too big to fail."

Trying to fix problems that affect vast numbers of people has an intuitive appeal that politicians and policymakers find irresistible, but several warehouses of research studies show that intuition is often a poor guide to fixing systemic problems. While it seems like common sense to pump money into an economy that is pulling the bedcovers over its head, the problem with most social interventions is that they target not robots and machines but human beings— who regularly respond to interventions in contrarian, paradoxical and unpredictable ways.

"How well does government do in helping the market to improve what it does?" asked Clifford Winston, an economist at the Brookings Institution and the author of the 2006 book, "Government Failure versus Market Failure: Microeconomic Policy Research And Government Performance (Paperback)" "The research consistently finds that, in fact, government efforts to correct 'market failures' have little effect or actually make things worse."

"There is a tendency for people to say, 'If things are safer, then I will take more risk,' " he added. "It does not have to involve government interventions: Drugs are developed to reduce blood pressure, so people say, 'Okay, I can eat more, and it does not matter if I gain weight, because I can take this pill.'"

Previous research has shown that people drive faster in vehicles that feel safer, attempt to bike on more dangerous terrain when they wear helmets and pay less attention to infants being bathed when the children are in 'bath seats' that are said to reduce the risk of drowning. Winston does not believe in one-size-fits-all solutions— whether interventionist approaches that liberals favor, or the hands-off strategies that conservatives prefer. Rather, he argues that solutions need to be tailored to produce measurably successful outcomes.

He once studied the effect of installing air bags in cars at a time when automakers were offering customers the option of buying cars with and without the safety devices. Winston found that people who bought cars with air bags tended to be the safest drivers to begin with. And now, lulled into a sense of security, they tended to drive faster, effectively canceling out the safety benefits.

The wrong lesson to draw from this is that air bags are useless. The right lesson is that air bags can improve safety when they are targeted at the riskiest drivers. As the safety devices become standard issue, for example, risky drivers are automatically protected [[but then, do they drive yet more dangerously, increasing general highway risk?: normxxx]]. And, as the safest drivers stop feeling they are 'extra' safe, do they take their foot off the gas?

When it comes to measurably reducing accident injuries in the short run, the most effective thing might be to try to reduce accidents in the first place, Winston said. He pointed out that a large fraction of accidents involve young people who have been drinking. "Things that are more targeted to discourage alcohol consumption among youth would be far better than saying, 'Let's try to make the vehicle as safe as possible.' "

Traffic psychologist Ian Walker at the University of Bath in England once conducted a similar experiment that vividly illustrates the problem with well-intentioned interventions that backfire. Walker rode a bicycle equipped with a distance sensor, video camera and a computer. Over 15-to-20-minute periods, he rode with his helmet on, then with his helmet off. He rode some segments three feet from the curb and others closer to the edge of the road. With each iteration, he changed a single variable. In the interest of being rigorous, he even obtained a shoulder-length wig of curly black hair, so that some passing motorists would think he was a woman.

It is not known whether any drivers turned around for a look after they passed the bicyclist. If they did, they would have been puzzled: "It was slightly embarrassing, because I had a beard at the time," Walker said. "I spent a couple of days going up and down the road wig on, and a couple of days going up and down the road, wig off."

Walker was trying to figure out whether his interventions changed the way drivers passed his bike. He came to two conclusions: Cars gave him more leeway when drivers thought he was a woman with curly black hair. And they gave him less leeway— getting dangerously close— when he wore a helmet.

Walker thinks drivers are influenced by unconscious stereotypes— they may believe that female bicyclists are less steady [[or, for male drivers only, that women represent potential mates!?! : normxxx]], and that helmeted bikers are pros. Again, it would be an error to draw the simplistic conclusion that bike helmets are a bad idea. Wearing a helmet does seem to change how people on the road perceive risk— but doing away with helmet laws could have unintended consequences, too.

"One big problem when you talk about risk is the extent to which people have an accurate idea of it— I don't believe people have an accurate idea of the risks they are looking at," Walker said. "If they have just seen something happen to another person, people believe it is more likely to happen to them."

[ Normxxx Here:  Then there is the well known "Window Washer effect" (at least, well known in the 'olden days'). In those days, all office building windows were built to similar dimensions as home windows, but were equipped with a hook on each side that a window washer could hook up his safety belt to when washing the outside of windows. New window washers assiduously made sure to hook up both sides before proceding. But then, in the interests of efficiency and 'convenience', after several months (or even less), they would switch to hooking up just one side. Yet later, many would not hook up either side and, from time to time, one of these would fall to his death or severe injury. Apparently, these relatively few (seemingly random) deaths were never enough to persuade any of the non-belting window washers to go back to belting, except (for a few) briefly.  ]


Shankar Vedantam:
Welcome to this online chat to discuss my Department of Human Behavior column today about unintended consequences of interventions. I am happy to take questions.

I [will be] joined by Clifford Winston from the Brookings Institution. Dr Winston is an economist who has studied the sometimes paradoxical and counter-intuitive effects of government interventions. He found, for example, that when automakers gave people the option to buy cars with air bags, the safety devices did not produce the expected results. (See why in the conversation below.)

Winston's work speaks to a term that has come up in the news recently— moral hazard. The term refers to the propensity of people to take on more risk than they ought to when they feel they have a safety net. Potential examples would range from the bailout of Bear Stearns, the big Wall Street firm that was deemed "too big to fail" and the dilemma faced by Democrats on whether to seat delegates from Michigan and Florida in the presidential primary race, when those states violated DNC rules as to when to hold primaries. Penalizing people when they violate the rules strengthens the rules, but makes people upset, as we saw in the political example. Bending the rules, as we saw with Bear Stearns, keeps people happier, but potentially makes it more likely that other people will also break rules because they suspect they will not be penalized... I'll start us off by asking some initial questions of Dr Winston.


Shankar Vedantam: Dr Winston, you told me in our interview about your research into the safety effects of airbags. Could you summarize for our readers what you found— and [theorize] why safety devices might not always produce the safety we desire?

Clifford Winston: My collaborators and I assessed the safety effects of airbags in two steps. First, we analyzed the types of drivers who acquired vehicles with airbags back when airbags were an option and not in widespread use. Second, we determined how drivers' behavior and safety changed— if at all— because their car had an airbag. We found that the safest drivers tended to acquire vehicles with airbags and that these "safe drivers" then 'took advantage of' the technological benefits of airbags by driving more aggressively. As a result of having airbags, these individuals' initial level of safety was not decreased by their then driving somewhat faster. At the same time, however, overall highway safety was not improved. In a nutshell, certain drivers "offset" the technological safety benefits of airbags by taking greater risks when they drove.


Shankar Vedantam: There is a large amount of research showing that when people feel they have reduced risk, they take more chances. People ride their bikes on more difficult terrain when they are wearing helmets; people seem more careless leaving cigarette lighters around their children when the lighters have a safety lock. Can you give us a short overview of the idea sometimes known as "offsetting behavior" and explain why it comes about?

Clifford Winston: The "offsetting behavior" you're summarizing is based on an idea developed in a number of disciplines, including economics, psychology, and transportation engineering. The idea, in theory, is that people start out with an initial threshold level of risk that they are willing to accept [relative to a specific given environment]. If [they perceive] their environment [as becoming] safer because of, say, the introduction of safety devices such as helmets, lighter locks, and the like, they may change their behavior by taking additional risks until they once again reach their initial risk threshold. In practice, in the process of re-assessing their original risk preferences in a new, safer environment, people may exceed their initial risk thresholds. [[This may be due, in part, to the fact that most safe/ unsafe practices tend to involve discrete rather than continuous amounts of risk, so the 'increased risk over original threshold' may be due to this 'excess' discrete risk.: normxxx]] In any case, it is common to observe people engaging in risky behavior that they once avoided because they perceive that the introduction of a safety device has made them 'safer'. Thus, public policies that mandate certain safety devices may have unintended consequences by leading to "offsetting" behavior that [at best] reduces the technological benefits of the devices. The example of a person choosing airbags as an option and then driving faster is another example of this kind of behavior.


Shankar Vedantam: Unintended consequences have surprisingly broad effects. Can you give us a sense of the range of these effects?

Clifford Winston: Public policies and innovations frequently result in unintended consequences because people change their behavior in unexpected ways in the new environment. We have already noted some examples in the context of safety. In the health area, the introduction of drugs to reduce cholesterol and reduce blood pressure may induce people who stayed away from fatty foods and alcohol to resume drinking and eating with less dietary caution once they start taking these drugs. Failure to enact certain policies also may have unintended consequences. For example, the failure to price road congestion has contributed greatly to urban sprawl. This is because people with lower values of travel time tend to choose to live further from their workplace to live [in order to maximize other perceived values, e.g., increased 'rurality' or larger homes for similar costs as closer in]. Road pricing would increase the out-of-pocket costs of commuting and cause some of the people who live far from work to move closer to their workplaces.


Shankar Vedantam: You told me some weeks ago that the proposal by Hillary Clinton and John McCain to suspend the gas tax was an example of how government interventions could have unintended effects. What might they be in that case? I was also thinking about the DNC's dilemma about seating the Michigan and Florida elections in the Democratic primary— to not seat them would anger many voters, but to seat them could send a message to states in subsequent elections that the rules of the party can be flouted without too much consequence.

Clifford Winston: The proposal to suspend the gas tax was faulty because it didn't think through how motorists would respond to the "lower" gas prices [[and how a relatively 'fixed' supply of gas is 'rationed', i.e., through price— as are most commodities in 'free' countries: normxxx]]. If the tax is suspended, that would cause an initial reduction of the price of gas at the pump. But motorists would respond to the lower gas prices by driving more! With the supply of gas fixed in the short run, the increase in demand would cause the price of gas to return to nearly its prior level when the tax was in place. Thus, suspending the tax would not reduce fuel consumption, but the government would lose tax revenue and the oil companies would gain revenue. I don't think that was the effect that Senators Clinton and McCain had in mind [[moreover, ironically, increasing the gas tax at the pump would also not greatly change the price of gas in the long run, but would simply and most effectively add to the taxes on the oil companies: normxxx]].

Thus far we have been talking about the effects of changing economic policies that may induce consumers to change their behavior in ways that they perceive benefit them, but that may not be consistent with policymakers' goals. The same ideas also apply to the political world. If the DNC changes its election rules, then it is likely that at least some states will change how they run elections. These changes might benefit the states and their voters, but might damage the Democratic Party.


Shankar Vedantam: You are not an ideolog who believes in one size fits all solutions— you are neither for nor against interventions in general, but support trying to find out which interventions have socially desirable effects. Do you think we have been doing that in our response to the economic slowdown and the subprime mortgage mess?

Clifford Winston: My empirical exploration of the economic effects of microeconomic policies has taught me, among other things, that policymakers "rush to judgment" and do not think through the full consequences of their policies. In addition, policymakers miss the opportunity to learn from a retrospective assessment of the policies they have already enacted. My book, "Government Failure versus Market Failure" [see above], sought to inform policymakers about the effects of a broad range of their policies on consumer welfare. The picture was not pretty!

Policymakers obviously feel great pressure to take quick actions in the face of a slowdown and massive financial losses in the housing sector. But I fear that policymakers will proceed without understanding fully what factors have caused these problems and whether the policies they enact will actually improve the situation or make matters worse. I do not specialize in macroeconomics or housing, but I think policymakers would be well advised to blend an understanding of what caused the problems they wish to solve with some humility about their track record so far in solving such problems, as well as a dash of faith that some pragmatic steps to help people solve their own problems can go a long way.


Newington, Va.: For Winston, if political measures to respond to a crisis like [increasing] gas or [decreasing] housing [prices] usually do not work out because of unintended consequences, why don't politicians catch on to this? Why do they keep trying 'quick fixes'? [['Human nature?' Like pulling your finger away quickly from that hot stove? Or 'jumping out of the frying pan into the hot fire'?: normxxx]]

Clifford Winston: First, politicians are under great pressure to "do something" and the very act of responding can, in the short run, 'take the heat off'. More importantly, it takes time to assess whether a response has been effective or compromised by unintended consequences. By the time the evidence is developed, politicians have moved to other 'more pressing' issues and are not likely to be very interested in looking back on past issues [[And, traditionally, if the 'unintended consequences' are painful enough, they will attempt to fix those; they will almost never 'go back' to the original problem and try another 'fix'; traditionally, physicians are prone to the same error and, probably, so are most of us: normxxx]]. Finally, newly elected officials often take the view that they can solve the problems that their predecessors were unable to solve. [[That's why we seem to repeat most of the same remedies and results every time we see a new physician for the same old complaint; they rarely seem to accept the recorded results of past physicians, or our testimony, but must 'prove it' for themselves.: normxxx]]

Shankar Vedantam: That's all we have time for today. Thanks for the questions and comments.

Thanks especially to Clifford Winston of the Brookings Institution.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

No comments:

Post a Comment