Too much safety may be bad for you

Human beings have an odd tendency to evaluate risk as much by whether they feel safe before they start as by the inherent nature of the risk, or the chances that something will go wrong. We evaluate risk intuitively, and intuition is often a poor guide in this area.

That’s the conclusion of research by Clifford Winston, an economist at the Brookings Institution and the author of the 2006 book “Government Failure versus Market Failure,” as reported in The Washington Post (“Taking More Risks Because You Feel Safe”).

“The research consistently finds that, in fact, government efforts to correct market failures have little effect, or actually make things worse.”

“There is a tendency for people to say, ‘If things are safer, then I will take more risk,’ ” he added. “It does not have to involve government interventions: Drugs are developed to reduce blood pressure, so people say, ‘Okay, I can eat more, and it does not matter if I gain weight, because I can take this pill.’”

We are all poor estimators of risk. If something bad happens to someone close to us, we suddenly feel more vulnerable. So long as problems seem more remote, we happily assume we will be immune.

The more we as a society provide ’safety nets’ to help people out of trouble, it seems, the more likely people will be to get into trouble in the first place. When financial institutions suspect that governments will bail them out, fearing the consequences of a major bank collapse, they become more willing to make risky loans and dabble in investments that stand a high chance of going wrong.

What can be done? You could follow the argument to one logical conclusion and refuse to provide anyone with any help, arguing that they got into the mess in the first place; and their collapse and destruction will offer others a stark example of the need for greater caution.

That seems extremely harsh, though firing at least a few CEOs and other top executives of major financial institutions without big golden parachutes has an intuitive appeal. So does putting one or two in jail. Maybe the fact that most know they will be disgustingly rich whether their leadership is successful or not encourages them to take self-aggrandizing risks more readily. I suspect it does.

Still, the wider question remains: how far should a civilized society allow people to be hurt by the consequences of their own foolishness, when we have the power to help them? Does the importance of showing everyone else a useful message outweigh the pain and misery of individuals?

I don’t claim to know the answer, but it’s a fascinating — and very timely — question.

Technorati Tags: risk-taking, facing the consequences, financial rescue packages, government intervention in markets, financial risks, the consequences of poor judgment