‘Adversity makes men, and prosperity makes monsters.’ –Victor Hugo
One of the problems with the rise of behavioral economics is that too often behavior is defined as irrational, the result of cognitive screwups. I’ve dealt with this issue before, but James Kwak convincingly argues that the BP oil disaster is not due to a cognitive failure to assess risk. (…) this is the key point:
The problem isn’t that people have cognitive biases in assessing unlikely events. When you’re dealing with a big company like Citigroup or BP, you have many people applying lots of clever thinking to these problems. The problem is that there is a systematic bias within these companies against certain assessments and in favor of others. That is, the guy who shouts, “Danger! Danger!” will be ignored (or fired), and the guy who says, “Everything’s fine, the model says disaster can strike only happen once every hundred million years” will get the promotion — because the people in charge make more money listening to the latter guy. This is why banks don’t accidentally hold too much capital. It’s why oil companies don’t accidentally take too many safety precautions. The mistakes only go one way. You have executives assessing complex situations they don’t even begin to grasp and making the decisions that maximize their corporate and personal profits. (Is BP’s CEO going to give back years of bonuses now?)
…This isn’t inability to quantify the likelihood of unlikely events; this is willfully looking the other way.
ceramic { Takashi Hinoda }
