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Oct
28
2009

Moral hazard: bonuses, seat belts and condoms

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Moral hazard” is a term that dates back to the 1600s. Until recent times its use has been mostly confined to the insurance industry to refer to behaviour that responds to changes in perceived risk.

The industry has noticed that people who have contents insurance are less careful about locking up. It has also noticed that drivers of cars with ABS brakes (superior brakes) did not have fewer accidents – they had different accidents – accidents consistent with high-performance cars, which is what they had become.

Why “moral” hazard? Clearly the insurance industry was disconcerted by behaviour that upset the calculations of its actuaries. Such behaviour had to be wrong – immoral. But such behaviour is universal. Risk management is an exercise that involves striking a balance between the potential rewards and losses of decisions made in the face of uncertainty. A less judgmental term to describe this phenomenon is risk compensation. Legislators and regulators routinely ignore it.

Britain is suffering simultaneously from under-regulation and over-regulation. The deregulation of the financial markets under Margaret Thatcher gave a relatively small number of bankers free rein to contrive incentive structures that paid them fabulous rewards for taking risks with other people’s money. Meanwhile other spheres of activity are being suffocated by an excess of regulation, the most egregious example being the Independent Safeguarding Authority. This new bureaucracy, created as a response to the murder of two young girls in Soham, is charged with vetting an estimated 11.3 million people before they will be permitted to work, or volunteer with, children or vulnerable adults. The vetting involves a Criminal Records Bureau check on all 11.3 million after which “we will decide on a case-by-case basis whether each person is suited to this work”.

Leaving aside the mind-boggling expense and bureaucracy required to perform this feat, its effect is almost certain to be perverse. A CRB check will be seen as an insurance policy; behaviour that might previously have aroused suspicion is now less likely to be questioned because some superior authority has certified the suspect as “safe”.

After the Thatcherite deregulation, under New Labour we have had the Better Regulation Commission, the Better Regulation Executive, the Better Regulation Advisory Council and now BERR – the Department for Business, Enterprise and Regulatory Reform. All these attempts at reform have explicitly acknowledged the damage caused by excessive regulation and have been powerless to resist it. Fundamental to this failure is a blindness to risk compensation.

Every perceptible safety measure that does not make the people want to be safer will provoke offsetting behaviour. The effect can be seen wherever one looks – from protective equipment on the sports field, to the settlement of flood plains protected by higher levees, to bailed out banks. It can be found on the road and in the bed – condoms are seat belts for sex concludes one study that invokes risk compensation to explain the failure of both safety measures to deliver the protection they promised.

Which takes me to my final point. The College of Emergency Medicine is leading a campaign to make cycle helmets compulsory. If successful it will result in a significant decline in cycling with a loss of attendant social, environmental and health benefits with no life saving benefit. It will kill off London’s new cycle hire scheme. In support of their campaign they cite the “success” of the seat belt law. But the law has failed and should be repealed. The Parliamentary Advisory Council of Transport Safety resolutely refuses to acknowledge evidence of this failure (click here, here and here). In its blindness to risk compensation and its consequences it risks helping to create a new, genuine, moral hazard.

PS    The Manifesto Club campaigns against the hyperregulation of everyday life. It has a refreshing website – http://www.manifestoclub.com/.

6 comments

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  1. Andy in Germany says:

    Is there anywhere we can write to protest this law?

  2. Karl-On-Sea (Twitter: @karlonsea) says:

    Nicely argued.

    Safest car I’ve ever driven? 1962 Morris Minor – no seat-belts, huge steering wheel inches from your chest, skinny cross-ply tyres, and brakes about as effective as old-style caliper brakes on steel bike rims in the wet. So many opportunities to die!

    I have also noticed risk compensatory behaviour in my own riding when with a helmet. Even though I know that the 1″ of polystyrene isn’t magical, won’t protect me from any but the most trivial of possible impacts, and certainly won’t deflect several tons of metal from crushing me like a limp bag of giblets, I’m almost certain that my riding when lidded-up is less cautious than with.

  3. Dr. Robert Davis says:

    This is a good summary of the importance of looking at risk compensation (or behavioural adaptation).

    What can also be included as examples of why risk compensation (RC) should be regarded as important with regard to safety on the road, are the following:

    1. Long term RC. As well as the immediate adverse effects of seat belt legislation (and other forms of idiot-proofing the car or road environment for motorists), we have a long term effect. This is essentially a cultural phenomenon whereby the assumption of “safety” for car occupants decreasingly becomes about careful driving, and more about securing a “safe” car (seat belts, crumple zones, air bags, ABS , collapsible steering wheels etc.) and a “safe” road environment (central reservation crash barriers, cutting down roadside trees, making lamposts collapse on impact in ways which minimise danger to car occupants etc.).

    All of these changes which have occurred since WW2 are forms of idiot-proofing which have a cumulative adverse effect on the safety of those outside cars. This cumulative effect is not simply observable in terms of time-series analyses which show the adverse effects of specific interventions such as seat belts, but manifests itself in a less tangible, but nevertheless definite, effect.

    So, for example, would the antics of the likes of Jeremy Clarkson be as acceptable as they are in today’s safety culture if we had the cars and roads of the 1950s? I think not.

    2. There is a definite POSITIVE manifestation of RC. In the same way that road users become less careful when adapting to a reduced perception of hazard, they can become more careful when confronted by an increase in hazard.

    So, for most motorists, the increased presence of pedestrians and cyclists (seen as a sort of “hazard” insofar as crashing into one is generally thought of as undesirable, whatever the opinions of motorists about either or both groups of road user)can have a POSITIVE effect.

    This positive effect can be seen on the (retrospectively calculated) casualty rates – casualties per journey or distance travelled by cyclists – when numbers of cyclist increase. This phenomenon among cyclists is referred to as “critical mass” or “Safety in Numbers” and has been seen dramatically in London over the last decade.

    It has also been seen with pedestrians in street environments where elimination of traditional “safety measures” in “shared space” or “naked streets” has led to motorists being compelled by the sheer immediate presence of pedestrians (where speeds have reduced as a consequence of,or in addition to, these measures)to behave more carefully towards them.

    For evidence and further information on these phenomena, take a look at http://www.rdrf.org.uk , as well as this website

  4. Duke Maskell says:

    Isn’t the ugliest consequence of all that for children–not only driving them off the roads they could once play on but–by turning roads into a universal network of deadly barriers–simultaneously shutting them off from anywhere else they might play too? What ‘road safety’ has come to mean for children is the aspiration to abolish them as a hazard for those in cars.

  5. Chris Owen says:

    On BBC 1’s “One show” last night they showed in detail the mass production cheese making process. Even in mass production it involves workers using their hands to work the cheese. The narrator pointed out that workers use their bare hands because the factory found that forcing workers to use gloves actually worsened food safety. This was merely prime time TV entertainment so there were no more details but it sounded suspiciously to me (I could be completely wrong) like a case of a business realising that risk compensation was making things worse.

  6. Dudley Degori says:

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