Wednesday, June 14, 2006

Rational Choice and Catestrophic Possibilities

Thanks to Al Gore's movie "An Inconvenient Truth" the global warming debate is back in the news. In reading up on this debate I have encountered another example of intellectual recklessness in the attempt to convince people that they have nothing to worry about regarding CO2 emissions.

An example of the argument that I would like to look at today can be found in the article “Global Warming Fever” by Deborah J. Saunders. She wrote:

Because this is a crusade -- and not about science -- Gore is drawn, not to the most reasoned scenarios, but the most apocalyptic.

To illustrate her point, she quotes the fact that Gore was focusing on the possibility of a 20 foot rise in sea-level as opposed to the more moderate level of one to three feet.

Saunders is making the argument that we only need to consider likely alternatives in planning a strategy. This is completely irrational. There are rational models for decision making, and they argue for ways to give a fair weight to extreme but unlikely possibilities.

To illustrate how basic decision theory would incorporate such an outcome, imagine the following scenario:

You are offered a ticket where there is a 99% chance that it will be worth $100, and a 1% chance of being worth $1,000,000. The question is: if you were to buy the ticket, how much should you pay? How much is the ticket worth?

The basic formula that decision theorists use says to multiply each “payoff” by its “probability” and add the sums together. In this case, using this basic formula yields the following:

($100 * 0.990) + ($1,000,000 * 0.010) = $10,099

Note: This is a basic formula. There are other issues, such as the 'net present value' of a future result, that complicate this formula. The further in the future an event is, the less we should pay today to avoid it. However, these issues have no effect on the question of how to treat small probabilities of catestrophic events.

The same formula works for costs. If instead of getting a ticket that can pay you the amounts listed above, assume that these are costs that you are facing. There is a 99% chance that your situation will cost $100 and a 1% chance that it will cost $1000000. Basic decision theory says it would be worth $10,099 to get out of that situation. Less than this, and you have a bargain. More than this, and you are paying too much.

If we make decisions the way Saunders would have us make them, you would not pay any money to avoid this catestrophic result. You would look only at the likely consequences and determine that it makes no sense to spend a single dime to avoid them. The high-cost/low-probability “apocalyptic” outcomes would not show up on your radar screen.

If a person’s job is to reduce risk for the company, the best strategy he can follow is to reduce the likelihood of a catastrophic outcome.

In this example, let us assume that we have an option. For $1000, we can cut the chance of a catastrophic outcome in half. What should we do?

The basic formula for rational choice yields the following formula:

($1100 * 0.995) + ($1001000 * 0.005) = $6099.50

Recall, we are spending $1000 to reduce the risk of a catastrophic outcome by half. The formula for rational choice says to buy the package.

If somebody on the Board of Advisors were to argue, “The consensus view is that the upgrade will only cost us $100, and we are going to have to pay that no matter what. It is foolish to spend $1000 for nothing,” then this person needs to go back to business school. Her recommendation is simply foolish.

My day job includes, in part, managing software upgrades for my company. When it comes time to install an upgrade to important corporate software programs, I am responsible for testing the system and making sure that the company gets positive results. The last thing I want in my job is to flip the switch on a new software package and watch the company screech to a sudden stop because nobody can do their job.

Because of what I learned in the study of rational choice, I always ask the question, “What is the worst that could happen?” The one area where I can have the biggest impact on the success of any project is by avoiding the catastrophic outcome. I am interested in avoiding the lesser harms, but they are of secondary concern. If we encounter a minor problem, as long as everything is generally running smoothly, we can deal with it. What we can’t deal with is a catastrophic outcome.

Here’s an example: Where I work, we do regular backups of most of our computer systems. Almost every backup is a waste of resources. I can honestly say that more than 99% of our backups never get used – so we invested that money in backing up those systems for nothing. However, the purpose of a backup is not to prepare for the likely events that happen every day. The purpose of the backup is to reduce the cost of the extremely unlikely catastrophic events that might happen but probably will not. This is the rational option.

Here is another example: Drunk drivers typically make it home in one piece. Those who drink and drive increase the chance that they will cause an accident, but the likely result is still that they will make it home. However, we do not design our laws against drunk driving to deal with the typical result. We write our laws to deal with the atypical but catestrophic results that could be avoided if we prohibit people from drinking and driving. This is the rational option.

Saunders is asking us to approach the global warming issue in a way that is simply stupid . . . irrational. She seeks to inspire us into stupid and irrational action because a stupid and irrational voter is just the type that is likely to keep the Republican Party in power and provide greater profits to its financial backers.

Why?

Let’s assume that you have built a dam. For $1000, you can cut the chance that your dam will break and flood the property of everybody who lives downstream by half (from 1% to 0.5%). Should you spend the money?

That depends. Will you have to compensate those who live downstream if you gamble and lose?

Let’s say that you live in a system where, if the dam breaks, the property owners downstream will get no compensation from you for their losses. They will have to pay for reconstruction and for burying the dead out of their own pockets. If you don't have to pay anything if the dam breaks, then why spend $1000 to reduce the chance that the dam will break? There is nothing in it for you.

However, let's say that you will be held responsible for any damage that results when your dam breaks -- a bill of $1000000. If this is the type of society you live in, now you have an incentive to make sure that your dam does not break. Now, the rules of rational choice say that you are better off spending the money than pocketing it.

The energy companies today live in the first type of world. If their global-warming dam breaks, flooding all coastal cities and causing huge damage to those who live downstream, as it were, they will not be paying a dime in damages. It will be left to those who live downstream -- those who survive -- to pay for any repairs out of their own pocket. So, the energy companies have no reason to do anything but pocket the money that they could have spent reducing the chance that the global-warming dam will break.

Or imagine that you live in a country where the government has passed laws protecting drunk drivers from any costs associated with the accidents that they cause. If a drunk driver should crash into another car and kill or injure its occupants, those occupants would be responsible for the costs. What effect would we expect this to have on the number of drunk drivers on the road?

The relationship that we have with the energy companies in the world today is the same relationship that the victims of the accident described above stand in relation to the drunk driver. They get to take risk our lives, health, and property -- and those of our children and grandchildren -- with the right to walk away from whatever suffering they might cause. So, they have no incentive to avoid that suffering, and they show their lack of concern every day. If they should find themselves in a global-warming collision, they will leave their victims in the tangled wreckage, stagger over to the next car, and continue their trip home.

The global warming companies are trying to convince us that the global warming dam would not brak, and we have nothing to worry about. This is because they will not be held responsible for their mistakes. Find some way to hold them responsible for their mistakes, and they will suddenly discover all sorts of reasons to make sure that the global warming dam does not break.

Such is the system that exists today.

1 comment:

Martin said...

I saw this column in my local paper. It's against the Al Gore movie
(Saudners has also written against evolution in the past).

After calming down, I tried to figure out what she was actually saying,
and I think this is it:

She says that Al Gore said EVERY scientist supports the theory of global
warming. But she lists three scientists who disagree with him;
therefore, Al is lying; it's proof that Al is not interested purely in
facts, but about his personal crusade. And anyone on a crusade should be
approached with a healthy dose of skepticism.

If that's her argument, it's pretty weak. But I have to admit, I wasn't entirely sure what her point was, if she indeed had a single point to make.