If you make an activity safer, people will take more risk. The inventions of seat belts, air bags, and anti-lock brakes, for example, have all inspired people to drive more aggressively. And if you put drivers in SUVs, rather than regular cars, they are more likely to hit the road during a snow storm.
In recent days, several media outlets have noted a similar phenomenon: if you make it easier to call for help, more hikers will get themselves in trouble. As noted over at MSNBC (ht Tyler Cowen):
Technology has made calling for help instantaneous even in the most remote places. Because would-be adventurers can send GPS coordinates to rescuers with the touch of a button, some are exploring terrain they do not have the experience, knowledge or endurance to tackle.
Rescue officials are deciding whether to start keeping statistics on the problem, but the incidents have become so frequent that the head of California’s Search and Rescue operation has a name for the devices: Yuppie 911.
“Now you can go into the back country and take a risk you might not normally have taken,” says Matt Scharper, who coordinates a rescue every day in a state with wilderness so rugged even crashed planes can take decades to find. “With the Yuppie 911, you send a message to a satellite and the government pulls your butt out of something you shouldn’t have been in in the first place.”
So what does this have to do with the financial crisis? Well, it’s not merely that the government has been forced to save financial firms from things that they shouldn’t have been doing in the first place.
The broader idea is that people take more risks when they feel more comfortable. In the pre-crisis days, it appeared that business cycle fluctuations had gotten smaller. Because of this “Great Moderation”, firms and investors felt that they faced smaller macroeconomic risks when taking on new investments. Improvements in risk management had a similar effect, as firms and investors got better at managing pesky things like interest rate risk. These advances made it appear that risks were smaller and more manageable and, as a result, firms and investors felt more comfortable taking on more leverage and larger investment risks.
P.S. For additional coverage of Yuppie 911, see NPR.
And the obvious (at least partial) solution is…
…Anybody? Anybody?…
…(1) charge people for rescue — charge them enough to address the moral hazard issue, to encourage people to find a way out of the woods themselves if at all possible, and to remove/reduce the negative externality by compensating taxpayers for the cost and perhaps providing more compensation to rescuers putting themselves at risk, and
(2) publicize this new policy, perhaps including a regulation requiring that every package of those Yuppie 911 devices include notification that you’ll be charged through the nose if you need rescue (exceptions could be made if clearly not the result of excessive risk-taking).
Hell, charge enough to make it a profit-center to help out with local, state, or federal budgets.