Greg Ip’s framework in Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe is the contrast between what he calls the ecologists and engineers. Engineers seek to use the sum of our human knowledge to make us safer and the world more stable. Ecologists recognise that the world is complex and that people adapt, meaning that many of our solutions will have unintended consequences that can be worse than the problems we are trying to solve.
Much of Ip’s book is a catalogue of the failures of engineering. Build more and larger levees, and people will move into those flood protected areas. When the levees eventually fail, the damage is larger than it would otherwise have been. There is a self reinforcing link between flood protection and development, ensuring the disasters grow in scale.
Similarly, if you put out every forest fire as soon as it pops up, eventually a large fire will get out of control and take advantage of the build up in fuel that occurred due to the suppression of the earlier fires.
Despite these engineering failures, there is often pressure for regulators or those with responsibility to keep us safe to act as engineers. In Yellowstone National Park, the “ecologists” had taken the perspective that fires did not have to be suppressed immediately, as in combination with prescribed burning they could reduce the build up of fuel. But the economic interests around Yellowstone, largely associated with tourism, fought this use of fire. After all, prescribed burning and letting fires burn for a while is not costless or risk free. But the build up of fuel from failure to bear those short term costs or risks, as much of the pressure was on them to do, results in the long-term risk of a massive fire.
Despite the problems with engineers, Ip suggests we need to take the best of both the engineering and ecologist approaches in addressing safety. Engineers have made car crashes more survivable. Improved flood protection allows us to develop areas that were previously out of reach. What we need to do, however, is not expect too much of the engineers. You cannot eliminate risks and accidents. Some steps to do so will simply shift, change or exacerbate the risk.
One element of Ip’s case for retaining parts of the engineering approach is confidence. People need a degree of confidence or they won’t take any risks. There are many risks we want people to take, such as starting a business or trusting their money with a bank. The evaporation of confidence can be the problem itself, so if you prevent the loss of confidence, you don’t actually need to deploy the safety device. Deposit insurance is the classic example.
Ip ultimately breaks down the balance of engineering and ecology to a desire to maximise the units of innovation per unit of instability. An acceptance of instability is required for people to innovate. This could be through granting people the freedom to take risks, or by creating an impression of safety (and a degree of moral hazard – the taking of risks when the costs are not borne by the risk taker) to retain confidence.
Despite being an attempt to balance the two approaches, the innovation versus instability formula sounds much like what an engineer might suggest. I agree with Ip that the simple ecologist solution of removing the impression of safety to expunge moral hazard is not without costs. But it is not clear to me that you would ever get this balance right through design. Part of the appeal of the ecologist approach is the acceptance of the complexity of these systems and an acknowledgement to the limits of our knowledge about them.
Another way that Ip frames his balanced landing point is that we should accept small risks and the benefits, and save the engineering for the big problems. Ip hints at, but does not directly get to, Taleb’s concept of anti-fragility in this idea. Antifragility would see us develop a system where those small shocks strengthen the system and not simply being a cost we incur to avoid moral hazard.
The price of risk
Some of Ip’s argument is captured by what is known as the Peltzman effect, named after University of Chicago economist Sam Peltzman. Peltzman published a paper in 1975 examining the effect of safety improvements in cars over the previous 10 years. Peltzman found a reduction in deaths per mile travelled for vehicle occupants, but also an increase in pedestrian injuries and property damage.
Peltzman’s point was that risky driving has a price. If safety improvements reduce that price, people will take more risk. The costs of that additional risk can offsett the safety gains.
While this is in some ways an application of basic economics – make something cheaper and people will consume more – the empirical evidence on the Peltzman effect is interesting.
On one level, it is obvious that the Peltzman effect does not make all safety improvements a waste of effort. The large declines in driver deaths relative to the distance travelled over the last 50 years, without fully offsetting pedestrian deaths or other damage, establishes this case.
But when you look at individual safety improvements, there are some interesting outcomes. In the case of seat belts, empirical evidence suggests the absence of the Peltzman effect. For example, one study looked at the effects across states as each introduced seatbelt laws and found a decrease in deaths but no increase in pedestrian fatalities.
In contrast, anti-lock brakes were predicted to materially reduce crashes, but the evidence suggests effectively no net change. Drivers with anti-lock brakes drive faster and brake harder. While reducing some risks – less front-end collisions – they increase others – such as the increased rear end collisions induced by their hard braking behaviour.
So why the difference between seatbelts and anti-lock brakes? Ip argues that the difference depends on what the safety improvement allows us to do and how it feeds back into our behaviour. Anti-lock brakes give a driver with a feeling of control and a belief they can drive faster. This belief is correct, but occasionally it backfires and they have an accident they would not have had otherwise. With seatbelts, most people want to avoid a crash and a car crash remains unpleasant even when wearing a seatbelt. At many times the seatbelt is not even in people’s minds.
Irrational risk taking?
One of the interesting threads through the book (albeit one that I wish Ip had explored in more detail) is the mix of rational and irrational decision making in our approach to risk.
Much of this “irrationality” concerns our myopia. We rebuild on sites where hurricanes and storms have swept away or destroyed the previous structures. The lack of personal experience with the disaster leads people to underweight the probability. We also have short memories, with houses built immediately after a hurricane being more likely to survive the next hurricane than those built a few years later.
A contrasting effect is our fear response to vivid events, which leads us to overweight them in our decision making despite the larger costs of the alternative.
But despite the ease in spotting these anomalies, for many of Ip’s real world examples of individual actions that might by myopic or irrational it wouldn’t be hard to craft an argument that the individual might be making a good decision. If the previous building on the site was destroyed by a hurricane, can you still get flood insurance (possibly subsidised), making it a good investment all the same? As Ip points out, there are also many benefits to living in disaster prone areas, which are often sites of great economic opportunity (such as proximity to water).
In a similar vein, Ip points to the individual irrationality of “overconfident” entrepreneurs, whose businesses will more often than not end up failing. But as catalogued by Phil Rosenzweig, the idea that these “failed” businesses generally involve large losses is wrong. Overconfident is a poor word to describe these entrepreneurs’ actions (see also here on overconfidence).
I have a other few quibbles with the book. One was when Ip’s discussion of our response to uncertainty conflated risk aversion with loss aversion, the certainty effect and the endowment effect. But as I say, they are just quibbles. Ip’s book is well worth the read.