Re: poly: Re: the destruction problem (was: singleton)

From: Robin Hanson <>
Date: Mon May 04 1998 - 12:13:34 PDT

Hal F. writes:
>Our society, at least in the "advanced" parts of the world, is highly
>interdependent and therefore fragile. ...
>It is hard to see how to reduce this interdependence without paying an
>enormous economic cost. ...
>Maybe people are being irrational and not considering the full costs of
>interdependence when they make a decision. Considering a locally made
>good versus one shipped halfway around the world, the main difference is
>usually transportation costs. No one worries about what happens if the
>Y2K bug keeps the ships from operating, or a new virus brings down the
>transportation infrastructure. These things have never happened before,
>so we don't have a good intuitive sense of their likelihood. ...
>Once there is a disaster, if we survive it, people may begin to add these
>considerations into their economic choices. ...
>The question is whether that first triggering disaster will be mild
>enough to be survived, while being harsh enough to scare people into
>building robustness and durability into their economic relationships.

To the extent that financial speculators correctly estimate the chances of
large hits to the world economy, it seems that our economic intitutions
are sufficient to deal with the issue. The cost of funds of a business
depends on the correlation of its risk with the market as a whole. This
offers large rewards for projects whose returns would be high under a
big hit to the world economy.

Actually, economists are somewhat puzzled that investors demand such a
large risk premium, a premium that doesn't seem justified by known
historical economic trends. Thus investors reward attempts to limit the
effects of big crashes much more than academics think the data justifies.
The claim that even so investors are underconcerned about big crashes seems
especially remarkable in this context.

Robin Hanson
RWJF Health Policy Scholar, Sch. of Public Health 510-643-1884
140 Warren Hall, UC Berkeley, CA 94720-7360 FAX: 510-643-8614
Received on Mon May 4 19:19:37 1998

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