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The role of risk in BP's oil leak
David Leonhardt, New York Times columnist and reporter
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TEXT OF INTERVIEW
Kai Ryssdal: New York Times economics columnist David Leohnardt has been writing about why the blowout on the Deepwater Horizon happened. Not really the mechanics of it all, but more the human nature of it.
David, hello again.
David Leohnardt: Thank you Kai. It's good to be on.
Ryssdal: The drive for profits and how that affected some of BP's actions, we have all read and heard much about in the past six weeks. You, though, this past weekend in the magazine, brought up another point. Something else that might have been a bit more human involved.
Leohnardt: That's right. First of all, I agree that the drive for profits played a big role. And I think it interacted with this other more universally human issue, which is we're not very good at estimating the odds of something that is unlikely, but that brings huge costs -- like an oil rig essentially blowing up.
Ryssdal: Or like, gee, I don't know, the entire U.S. housing industry going down the train, right?
Leohnardt: That's right. So one of the justifications we heard for the housing bubble was that, "Well, no, we're not in a huge bubble, because we've never been in one before." Basically, what they said was house prices have never fallen nationally, you had people on Wall Street, as Michael Lewis has reported, building models that didn't even allow for the possibility that house prices would fall. And so what they did a bad job of doing was saying, "OK, how should we deal with this thing that we think is unlikely, but that if it happens -- based on the edifice that we have built -- could cause terrible damage to the United States economy." And because they had a hard time imagining it, they didn't take the necessary precautions.
Ryssdal: Well, let me ask you this, though: That's the underestimation of risk. What about the overestimation of something happening?
Leohnardt: That happens as well. When something is very easy to imagine, we often overestimate its odds of happening. One example of that is plane crashes. We think they're much more common than they really are, we tend to react to them more than we react to car crashes, for example. When in fact, plane crashes are much less common than car crashes and kill many fewer people.
Ryssdal: Is there a market mechanism that can correct this bias that we have?
Leohnardt: Yes and no. To some extent, there's nothing we can do to magically get rid of this bias. But that being said, you want to design policies that would push back against it. What's tragic in this case is that we actually had a policy that aggravated. We have capped the amount of damages that oil companies would pay for a spill like this. And if anything, that encourages them to take more risk, to not worry about these odds.
Ryssdal: This is that $75 million cap that was put in place after the Exxon-Valdez, and your point is that the BP guys who were making the decisions said, "Yeah, we don't have to worry so much, because all we're going to have to pay is $75 million."
Leohnardt: That certainly seems like a reasonable supposition to make. You have to think that encourages to take more risk to not worry about these odds.
Ryssdal: Mmmhmm. So, as we prepare for the inevitable slew of new rules and regulations that will follow this event, I guess it's your position that we're likely not to get it right. That we're going to put something in place that down the road, we will say, "Oh man, we didn't think this through."
Leohnardt: That's right. And we're specifically not likely to get it right in the following way: We are likely to overreact to this specific disaster, the one we can now easily imagine. But we are certainly likely to take not enough steps to prevent other similar catastrophes.
Ryssdal: Or just to bring it back to business in the economy, a financial crisis that will happen not like the one that we just had.
Leohnardt: That's right. The next one is not going to involve the housing market. Maybe it's going to involve something else that's even harder to imagine. We shouldn't always be so comfortable that everything's going to work out OK.
Ryssdal: David Leohnardt, the staff writer for the New York Times Magazine, also an economics columnist for the newspaper. David, thanks a bunch.
Leohnardt: Thanks Kai.
You can't even have this conversation, unless first you discuss British Petroleum's HISTORY of refinery explosions, oil pipelines breaking due to poor maintainance, rig losses, etc. That of the 330 oil rig spills since 1961, 50% occured in the last ten years.
In other words...this dumping of millions of gallons of oil in the Gulf isn't an freak occurance. There's a history of BP failures due to chasing record profits, that its happened often. Consider that, then decide what's causing it--over, and over again, with no learning from it whatsoever.
And then there's the "disasters" that are vanishingly unlikely, but that the policy-makers have a vested interest in "preventing" and so claim are certainties--most notably of late, the claim that humans have caused and are causing the world to warm at unprecedented rates, with every natural disaster you can imagine blamed on this supposed fact. Except, as the scandal that broke last December has shown to be more certain, it simply isn't true.
I work for an agency that tries to establish probabilities of different events happening and what they might cost in order to choose priorities for replacing and rehabilitating our infrastructure. We are constantly stuck between a rock and a hard place -if we preach that the sky is falling, nobody believes us. If we look at things too optimistically, then when something bad happens, people say we should have seen it coming. The reality is, at least in our agency, there are only so many dollars to go around and although there are many risks identified, there is never enough money to address them all. So you do what you can with what you have. No material thing will last forever and a lot of what was built at the turn of the century now needs replacing. Since the last two to three generations have been living for themselves today instead of looking toward the future common good, we have not invested in things that are needed to keep this country strong and prepared for the next generation. I feel sorry for my kids inheriting the mess that has been created by the "me first" generations.
David Leohnardt's point sounds so deceptively simple, but the lesson behind it is continually ignored at great public expense. Critical thinking should be active, not retroactive. Thanks for keeping Leohnardt's viewpoint in play. Here's to imagining the worst and living to tell the tale.
What I did not like about this story is it implies that everyone involved in this oil rig deployment is off the hook because we as humans cannot quantify such unknowns. And why do you have a economics columnist talking about this? You should at least have had an engineer talking about how all structures should have safety factors incorporated into their design. It's engineering 101. Then you could have invited an economist in to talk about the imprecise nature of who decides what level of saftey factor is chosen. Similar thorough safety factor analysis should have been done in the banking industry.
So, what is David Leonhardt's solution to the problem of risk estimation? Or is it simply that risk mis-estimation is an inevitable problem? And, yet, human engineering has accomplished marvelous feats that have accounted for risk quite well, evidenced in the pyramids of Egypt, and bridges that last over 100 years. And why, for example, hasn't the Golden Gate bridge collapsed into a heap in the bay? Because it is regularly inspected, and regular maintenance is conducted. And, certainly, it seems that a lack of regular inspection and maintenance is at the core of most disasters, including plane crashes, and certainly the BP spill. And, perhaps Wall Street needs its own from of regular inspection and maintenance, instead of everyone trying to fix the bridge only AFTER it has collapsed into the waters below.
Good story. This is such an important issue. We spend so much time worrying about the bad things that have happened and not enough about what might happen differently in the future. The often heard phrase is generals fighting the last war. One example is airport security. Every time a bad guy tries to create a bomb or weapon in a particular way, we focus so much of our effort trying to prevent that particular thing from happening again. Al Qieda is evil but not stupid. They are surely more likely to try something different next time. We need to spend more time and resources trying to prevent the things they might try next.
