The Odor of Fasces

Moral Hazard’s stock is rising. From time to time, concepts from academic disciplines flare like this in the culture. The best previous example is selection pressure from biology. Most recognize it in the popular formulation, ‘survival of the fittest’, which is actually not found in the biology literature as such and  is instead a reformulation of the concept by political philosophers. Now, that misappropriation is not entirely the fault of the political philosophers. The biologists deserve some of the blame. Evolutionary biology is exciting, and when scientists get excited about new ideas, they tend to reexamine the edges of their field. They start saying things like, ‘science is either physics or stamp collecting’, and speculating about a theory of  everything. Once that door cracks open, unruly concepts, like ‘survival of the fittest’, tend to squeeze through and start trashing the place. Economics is no different.

We live in economically exciting times, so all sorts of people who would normally pay no attention to economic theory are enthralled by it. As economics gets lifted to the surface of public consciousness, the temptation grows to use it as a universal theory of human behavior. Economics is even more vulnerable than biology to this temptation, since it is a non-experimental science. As such, it must rely on modeling to progress. The economist examines statistical data, formulates a hypothesis to explain why it looks the way it does, constructs a model based on the hypothesis, then waits to see if future data match the model’s predictions. This process makes for a pretty hazy crystal ball, ripe for projection. The image is not clear; it could be a picture of everything –  a tempting proposition. 

 Probably no other economic model better exemplifies that temptation in action than does Moral Hazard. This theory offers a  model to explain one big aspect of risk-taking behavior. The idea is, if a person is confronted with a risky venture, and they know someone else will pay the consequences of a negative outcome, that person will be much more likely to undertake the venture, particularly if the payor is less aware of the risk. Some economists, and many more of the public at large, have used Moral Hazard as an argument against providing rescue services to participants in dangerous sports. If climbers, solo sailors or spelunkers can expect rescue when something goes wrong, more people will take bigger risks. This is an expanded application of Moral Hazard from the realm of purely economic risk to that of personal risk and it doesn’t quite work.

 Moral Hazard relates to how people treat their stuff, or rather how they treat their stuff differently than they treat other people’s stuff. It explains why people stomp on the gas in a rental car, build their (insured) house in a floodplain, or surf the internet at work. It may also explain why the guy lifting the couch in the middle might not be straining as hard as the guys on the ends. Economists classify Moral Hazard as a special case of information asymmetry. The guy on the street classifies it as a special case of freeloading. And it is freeloading, but it is also special. The concept explains very well how people take risks with stuff. Other factors determine why people risk themselves to no profitable end.

Personal risk behavior is complicated, as anything personal is complicated. It is much harder to take population data and build a model of the typical risk taker than the typical bread purchaser. But it is possible to sketch out the factors that influence people as they undertake potentially dangerous activities. A motive must come first. Psychologists like to characterize that motive as ‘novelty seeking’. Novelty is an unfortunate term. After all, fancy ice cream is a novelty, as opposed to good old vanilla, which is enough for all those who aren’t spoiled snobs. Curiosity is a better word. Of course, no single label captures the spectrum of forces which gives the initial nudge toward risky behavior. Curiosity is a vague generality, but it is as accurate as any other label, and it is simple.  A simple starting point is necessary because the initial motive pushes the individual into a complex current of forces which quickly transcend any simple model. Once in the stream, the interaction of boundries, personality characteristics, and  capability along with that motive steer the individual’s risk-taking behavior.

Every activity involving personal risk has two boundaries, inner and outer. The inner boundary is the requisite danger inherent in the activity. This border can be low and easy to cross, as in SCUBA diving. Though a beginner can hurt himself, the choice to do so is almost totally his. If his regulator fails, he’s only 30 feet from the surface. He can make diving pretty safe. Sky diving, on the other hand, has a higher barrier. A single failure deploying the parachute will, barring a Lotto-sized break, lead to death.

 Clarity demands a quick digression at this point to consider inherent risk. Inherent risk is distinct from statistical risk. Driving is inherently less risky than flying. Flying is statistically safer because the flying establishment makes it so. Driving is statistically less safe because the swirling mass which is the driving public, makes it so. If the driving public were turned loose in airplanes to disable their frontal lobes with alcohol, text while taxiing, and dodge air traffic control, chances are the statistical risk would soon reflect the inherent risk. It seems like an easy task, keeping these two different representations of risk straight. Yet, statistics are so pretty and malleable, and the other is so stiff and dull. The shine of statistical risk becomes important later, when considering the real appeal of the Moral Hazard argument to those who promote it.

For now, the important thing is: inherent risk defines the boundaries, both inner and outer. The outer boundary of any dangerous activity is where methods turn to means. Decompression tables in diving are an excellent example. For those operating between the inner and outer boundaries, the tables provide a guideline for avoiding the risks of decompression. Beyond the outer boundary, the tables serve as an outline for accomplishing the decompression process. In climbing, the equipment used as insurance against the consequences of a fall while mountaineering or climbing on a top anchor, becomes part of the technique for resting, taking necessary falls, and even making upward progress on Alpine or Big Wall climbs. Crossing that outer boundary assumes a different level of self-sufficiency and working knowledge of the inherent risks.

Of course, even crossing the inner boundary requires some prerequisite level of capability. For some activities, the price of entry is almost entirely psychological. The participant must simply have a tolerable relationship with fear. For most activities, however, a certain physical capacity is necessary as well. Either way, a natural screening process ensues, sorting out people who are willing to put up with some adversity in pursuit of their curiosity and have a baseline capability. Therefore, these people come with a certain set of characteristics and experiences that not only allows them to cross the inner boundary of a dangerous activity, but also tints their perception and expectation of what lies beyond. They are already inured to costs and odds.  

So, all sorts of variables – underlying motivation, the nature of an activity’s boundaries, capability, perception and experience –  influence people’s  choices to participate in a dangerous sport. Given this diversity of influences, does the Moral Hazard of a free rescue even play a role at all in people’s choices to voluntarily risk their lives for no economic compensation?

We all suffer from a ‘mild positive delusion’; we tend to overestimate our own abilities just a little bit. Psychologists have rediscovered this recently, but common wisdom recognized it all along. This fact underlies the aphorism,”A little knowledge is a dangerous thing.” The profile of avalanche victims seems to bear this out. Those most at risk are complete novices venturing into avalanche terrain. But next are those who have an intermediate level of education in avalanche safety. The groups with basic and advanced training both appear less likely to be caught in an avalanche. The intermediate student may have just enough training to inspire confidence and not enough yet to create doubt. Moral Hazard created by the possibility of rescue may affect decision-making in dangerous sports in a similar, though more expected way. It may contribute to the novice’s mild positive delusion, offering some false reassurance and lowering the barrier at that inner boundary a bit. But it isn’t likely the only or even a major factor in their decision-making. It almost certainly does not affect those operating beyond the outer boundary; they know better than to factor a rescue into their plans.

Economists who have looked at the question in terms of mountain rescue acknowledge this possibility. J.R. Clark and Dwight R. Lee in their article, Too Safe to be Safe: Some Implications of Short- and Long -Run Rescue Laffer Curves, look at rescues on Denali before and after the park instituted a rescue program for climbers on the peak. They show the statistics fitting into the Moral Hazard model. But they admit the weakness of this method. Indeed, around the time they published this article, the park service instituted a mandatory registration and education program. Rescues subsequently decreased by 53%, implying poor information, rather than Moral Hazard, was the principle factor driving rescue utilization.

But we can never really know. That is the problem with statistics and the curse of the non-experimental sciences. Yet that is the political appeal of statistical argument and models like Moral Hazard. The haziness of the crystal ball is vital to the rescue critics’ real contention. Whether the model is right or not, the statistics can fit the model. Plus, statistical risk is a shiny object, it looks good.  And looks are the most important thing for them, because they don’t really care whether or not the availability of rescue services creates significant Moral Hazard in dangerous sports. They just wish to use Moral Hazard as a Straw Man.

 “Make these daredevils pay for their own misfortune.”

“…There are inherent risks to these types of ventures and the expectation shouldn’t be essentially underwriting the insurance policy for those who are willing to take these risks…”

Or most honestly, “…The productive earning class needs to stand up and shut down the free handouts to the Eco Freako Adventurer Class.”

The comments above are responses to a Newsweek article asking who should pay the costs for rescues like those of three mountaineers stranded on Mt. Hood. Obviously, the concerns expressed go well beyond the practicalities of Moral Hazard, the supposed topic. In this case, as it does so often, Moral Hazard provides a suitable front for a deeper contention about human nature and the role of human society.

So, what is hiding behind the Straw Man? Lurking back there is the idea that man is basically selfish , mean and base; redeemable only through association with something greater than himself, like his society. Accordingly, activity which does not contribute to the aggrandizement of the society should not be encouraged. Inner works, like art for art’s sake or the pursuit of curiosity, are pointless and decadent. The very idea of Moral Hazard appeals to those who hold this view, because, with a little misinterpretation, it reduces all motivation to a transaction. All risky behavior is then explicable in terms of a tension between fear and avarice. Better yet if economic theory also offers a statistical argument they can abuse to lend their underlying view of human nature some authority.

This is in fact the same school of thought that gave us Social Darwinism and the ‘survival of the fittest’. It has stalked our social and political thinking since the days of Li Si and the Spartans. It persists because our race always contains a sub-population of individuals who look inside themselves and see nothing but fear and avarice, and therefore cannot imagine a wider range of motives in others. From time to time, those same weak and smarmy individuals have successfully promoted their idea to exercise huge and stifling power over entire nations. We’ve gotten better at recognizing it though. It can’t parade around undisguised anymore, it needs a front, like an economic theory for instance.  It needs a front because full face, it stinks like a rotten bundle of sticks.

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