More Spill Logic

Richard Posner writes a great column about low probability, high risk events. It’s a developed version of what I mentioned last week. Here’s Posner:

The regulators who could have insisted on greater preventive efforts were afflicted with the usual short horizons of government officials. Elected representatives did not want to shut down deepwater drilling over an uncertain risk of a disastrous spill, and this reluctance doubtless influenced the response (or lack of it) of the civil servants who do the regulating.

The horizon of the private actors was foreshortened as well. Stockholders often don’t worry about the risks taken by the firms in which they invest, because diversified stock holdings can help insulate them. Managers worry more, but they are not personally liable for the debts of the firms they oversee and, more important, the danger to their own livelihood posed by seemingly small threats is not enough to discourage risk-taking. It seems that no one has much incentive to adopt or even call for safeguards against low-probability, but potentially catastrophic, disasters.

h/t Ezra Klein.


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