A Small Chance

From Barry Ritholtz at the Big Picture Blog:


The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits — in particular, the benefits of avoiding low-probability events with disastrous consequences.

Think of oil spills, mine explosions, financial meltdowns or even global warming. There is a natural tendency of human beings to underestimate the odds of such seemingly unlikely events — of forgetting that the 100-year flood is as likely to happen in Year 5 as it is in Year 95. And if there are insufficient data to calculate the probability of a very bad outcome, as is often the case, that doesn’t mean we should assume the probability is zero.
-Steven Pearlstein

Fascinating quote that explains the game theory — and mathematical foibles — of the deregulatory free market extremists. This perfectly sums up the rationalizations used by those people who have emphasized the costs of regulation, but not the upside.

In a Democracy, when taxpayers have attempted to collectively protect themselves against corporate (and other) monied interests have had to argue against a growth storyline. That of course, turns out to have been a false narrative, but it carried the day for decades.

Pearlstein adds:
The biggest oil spill ever. The biggest financial crisis since the Great Depression. The deadliest mine disaster in 25 years. One recall after another of toys from China, of vehicles from Toyota, of hamburgers from roach-infested processing plants. The whole Vioxx fiasco. And let’s not forget the biggest climate threat since the Ice Age.

Even if you’re not into conspiracy theories, it’s hard to ignore the common thread running through these recent crises . . . regulators who were blinded by their ideological bias against government interference and their faith that industries could police themselves.”


http://www.ritholtz.com/blog/2010/06/understating-the-benefits-of-avoiding-low-probability-disastrous-consequences/