Making good decisions about risk
Published 11:32 pm Wednesday, January 6, 2016
Can Americans make good decisions about risks to life and limb? Many policy experts don’t think so. Although there are challenges, I think that people make better decisions than they sometimes get credit for.
The mirage of perfect safety provides a huge obstacle to good decisions. We value safety, so zero risk seems like a reasonable goal. But zero risk, when not impossible, almost always entails enormous costs. To see why, consider driving. Auto accidents claim over 35,000 victims annually, so it would be great to reduce this toll. We can do so by driving slower, but we then spend more time traveling. We drive faster than 5 mph because we want to get places in a reasonable time. Given the cost, we do not choose zero risk.
An excessive focus on one risk also leads us to ignore costs or unavoidable tradeoffs. A person who is extremely afraid of flying might choose to drive instead. They reduce the risk of dying in a plane crash to zero, but face a greater risk of dying overall.
People also estimate risks inaccurately. Misperceptions, which some observers view as evidence of poor decisions, are a consequence of the cost of information. Reading the Census of Fatal Occupational Injuries or the Centers for Disease Control’s mortality reports takes time and is boring. Most people rely instead on news reports. The media, however, cover stories people find interesting. Consequently Americans tend to think that more murders than suicides occur each year, and overestimate the chances of dying in plane crashes, tornadoes, or terrorist attacks.
Undoubtedly people make mistakes concerning risky choices. But government bureaucrats find it nearly impossible to unambiguously identify and correct mistakes, because of peoples’ different values and tolerances for risk. Personally I see no value and only risk in riding motorcycles and rock climbing. Yet I know that other people accept some risk of injury or death to enjoy these activities. The dread of the person who fears flying may lead her to choose a riskier but less terrifying mode of transportation. These decisions are not wrong.
Government also makes poor risk decisions. This really shouldn’t surprise us, since voters, politicians and bureaucrats all make the types of mistakes discussed above. But the environment also encourages poor decisions. One factor is bureaucracies addressing narrowly defined risks. Thus the FDA handles foods and medicines, the EPA covers environmental risks, and so on. This allows the assembling of great expertise about risks, but also encourages bureaucratic tunnel vision.
Here’s an example I’ve observed while researching the societal impacts of severe weather. Researchers or bureaucrats might remark how Americans’ preference to spend $5,000 on flat-screen TVs and not in-home tornado shelters is a problem. Holding one risk as paramount might strike us as ridiculous, but the attitude results from the narrowness of professional expertise combined with exclusive organizational focus on one risk.
The symbolic and disjointed nature of legislation also leads to tradeoffs being ignored. When a threat emerges, politicians want to be seen taking action to protect the public. So they pass a law and announce that we are now safe. The costs emerge only with implementation of the law, and then regulatory costs are typically hidden in new higher prices. Consequently we never really debate whether the improvement in safety is worth the cost.
Estimates of costs per life saved for different safety measures by economists help us make better decisions. A regulation estimated to cost $30 million and save 10 lives would have a cost per life saved of $3 million. Costs per life saved are comparable across different regulations. This identifies regulations with really high costs per life saved as bad investments.
Some people believe that it is wrong to talk about how much we should spend to save lives. They think that we should save lives regardless of the cost. And yet this is perhaps the greatest error we face when thinking about risk. Every potential life-and-death decision involves a value of life; our only choice is whether we evaluate the tradeoff. Ignoring tradeoffs produces inconsistent and costly decisions.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at firstname.lastname@example.org and like the Johnson Center on Facebook.