Tag Archives: risk

05.03.2013 | Unintended Consequences: Cholesterol, Cars and Unemployment

Statins, seat belts and unemployment benefits reduce some of life’s risks. Yes?

Not always…

Told that statin medication would diminish high cholesterol, some people eat more cheese, more ice cream, more steak. The result? Less healthy diets.

Knowing that seat belts increase auto safety, certain drivers become more reckless because there is less of a chance of dying in an accident. The result? An increase in pedestrian fatalities.

Designed as a cushion for those without jobs, unemployment insurance makes joblessness less risky. Economists have observed though, that when employers know workers have an alternative, they are not as concerned about firing them. The result? More unemployment.

A University of Chicago economist, Sam Peltzman has hypothesized that risk diminishing regulation has unintended consequences. Called the Peltzman Effect, sometimes the new incentives created by a risk reducing rule offset its benefit. The reason is the law of demand. When the cost of risk becomes cheaper, we might be willing to accept more of it.

Sources and resources: Below is a video of Sam Peltzman at Hebrew University explaining how the Peltzman Effect relates to financial regulation. As for my three examples, the first was anecdotal, the second from Dr. Peltzman’s research and the third from an Econtalk podcast interview of economist Casey Mulligan.

Posted by: adminEcon
Tags: financial regulation, Obamacare, Peltzman Effect, risk, seat belts, unintended consequences
Comments (0) Add a Comment

11.12.2012 | Behavioral Economics: When Do We Minimize Risk?

With Election Economics having concluded, for the next 4 weeks, Monday posts will focus on topics that relate to behavioral economics.

Let’s start with Hurricane Sandy and my own NJ neighborhood. Really though, we will be looking at how many of us manage risk.

After August 2011 Hurricane Irene, I lost power for 8 days and assumed it would never happen again. Less than 2 months later, with the October 2011 snowstorm, I again lost power for 8 days. After the second storm, my perception of the risk of losing power had changed and I soon decided to purchase a residential generator.

Economics Nobel Laureate, psychologist Daniel Kahneman explained my behavior. First of all, displaying “availability bias,” I began to overestimate the probability of an event because I could recall and therefore imagine it much more clearly.

And then I became a part of an “availability cascade” through which a public reaction conveys growing alarm about a future unpredictable event. Last year, I participated in “availability cascade” within my own neighborhood. Seeing an increasing number of neighbors purchase generators, I believed a generator was necessary. Had I looked at the probability of such an event during a longer time frame, I might have concluded it was not as likely.

Now, after Hurricane Sandy, many more of us might be reacting to an “availability bias” and “availability cascade.”

Describing the businesses that benefit from disasters, a lead article in the NY Times Sunday Business section reported that residential generator sales are soaring. At Wisconsin based Generac Power Systems, they are running 3 shifts 6 days a week to meet the change in demand from Sandy. One NJ contractor says he is booked through January 8 and has 4 or 5 neighbors appear when he arrives to give an estimate at a home. Are we observing examples of post-Hurricane Sandy availability bias–overestimating future probability–and availability cascade–emotional public reaction that spreads?

And a final fact: Availability bias and cascade worked in my favor. For Hurricane Sandy, I had a generator back-up when we lost power for 12 days. After other natural and manmade disasters though, they have resulted in a misallocation of public and private resources.

Sources and Resources: You can read the NY Times article, “The Mad Max Economy,” here while my behavioral economics analysis is based on sections of the Daniel Kahneman book, Thinking Fast and Slow.

Posted by: adminEcon
Tags: availability cascade, availaility bias, behavioral economics, Cass Sunstein, Daniel Kahneman, decision-making, Generac Power Systems, insurance, residential generators, risk, Thinking Fast and Slow
Comments (0) Add a Comment

04.11.2012 | Hedging Health Risks, Hedgehog Style

By Mira Korber, guest blogger.

Oppressive fluorescent lights, the antiseptic squeak of rubber soles on linoleum, and the omnipresent pulse of machines envelop you at the hospital. You’re anxiously awaiting the results of surgery on your beloved family member.

Her name is Harriet, she’s a hedgehog, and this actually happened.

This (just slightly) unusual medical story is the result of pet medical insurance. (NB: The purpose of any health insurance is not to pay for medical procedures, but rather to hedge against risk of medical disaster [see this Econlife post.])

Without the coverage, would Harriet would have undergone treatment? Maybe, maybe not.

Why? The proliferation of pet health insurance demonstrates a changing series of behavioral incentives. Logically, the more coverage you have for your pet, the greater the incentive to supply costly care and medications. Then, will you see an incentive to own more pets because insurance covers advanced treatments? Disregarding the cost of vet school, will more students see a lucrative future in veterinary fields?

A segment from NPR “This American Life” episode 392 exemplifies how incentives change for pet owners with insurance. Quoting a report from the National Commission on Veterinary Economic Affairs, NPR reports, “‘with pet insurance, clients likely will use your services even more often and opt for more advanced medical procedures.’”…insurance can reduce ‘price resistance on the part of the client…with cost concerns removed, clients become more engaged and more responsive.’”

Additionally, these statistics express the nature of a growing pet insurance market (cited from an informative USA Today article):

Pet insurance costs from $15-$75/month, and covers 80-90% of claims
Dogs are insured 4x more than cats
1% of American pets are insured, compared to Europe’s 20%
In 2011, Americans spent $50.8 billion on pets; $14.1 billion was health related expenditure

The Bottom Line? By providing health insurance to four-legged family members, owners are more willing to leap for the big-ticket bills. By the same token, vets are more likely to prescribe expensive procedures.

Find some interesting reads and blog source material below:

Details on Harriet the hedgehog. Information on dogs and the American economy, here.
VPI Pet insurance. And finally, The cost of advanced procedures, without insurance.

Posted by: adminEcon
Tags: health incentives, health insurance, incentives, medical treatment, pet health insurance, pets, risk
Comments (3) Add a Comment

04.01.2012 | Should Supreme Court Justices Know Economics?

Just some thoughts today about economics and the Supreme Court. Listening to Tuesday’s oral arguments, I became concerned about some economic basics. Markets and insurance were key ideas. However, no one defined a market and insurance was initially mischaracterized.

In my econ class, we define a market as a process. Determining price and quantity, markets have a demand and a supply side. On the demand side are buyers who are willing and able to purchase different amounts of a good or a service at different prices. Correspondingly, on the supply side are sellers who are willing and able to provide different amounts of goods and services at different prices. In class, we assess markets through the impact of the participants. However, Justice Ginsburg suggested that “…the people who don’t participate in this market are making it much more expensive for the people who do; …”

As for insurance, Justice Kagan said, “…health insurance exists only for the purpose of financing health care…We don’t get insurance so that we can stare at our insurance certificate. We get it so that we can go and access health care.” Accurately, the attorney for the respondents (opposing the individual mandate) said, “…I’m not sure that’s right. I think what health insurance does and what all insurance does is it allows you to diversify risk. And so it’s not just a matter of I’m paying now instead I’m paying later. That’s credit. Insurance is different than credit…”

Curious, I checked the Justices’ bios. Justice Kennedy attended the London School of Economics. Otherwise, I found little evidence of economics in anyone’s background.

My bottom line: Economic thinking provides a disciplined approach that would be meaningful when deciding the scope of the Commerce Clause and defining health insurance.

Posted by: adminEcon
Tags: Affordable Care Act, demand, individual mandate, insurance, risk, supply, Supreme Court oral arguments, thinking economically
Comments (0) Add a Comment

02.17.2012 | The Riskiest Movies

Because Bart the Bear was no ordinary bear, anytime he appeared in a movie, the cost could have been $250,000. Yes, Bart’s salary was pricey but the $250,000 was all about insurance.

Most producers and movie studios require insurance. For stars, for delays, for injury, even for a Screen Actors Guild strike, insurance diminishes the risk. As a production cost, it can equal 1 or 2 percent of the film’s total expenses.

Based on insurance estimates, “The Girl With the Dragon Tattoo” was the riskiest movie last year. Other very risky movies included “Salt” in which Angelina Jolie did her own stunts and “Into the Wild” because of its rough terrain and animal actors.

Some insurance examples? When John Candy died while filming “Wagons East,” the movie makers received $10 million. Knowing that Nicole Kidman had a bad knee when she made “Cold Mountain,” insurers insisted on body doubles for any scene that would stress her knee. For actors who have been in rehab, premiums tend to be higher or unavailable.

As for Bart, one insurance executive explained, “If you have a bear from the zoo, he’s worth whatever a bear costs, maybe $5,000. But if a bear’s trained and pretends to attack on command, then he’s worth $250,000.”

Our bottom line? Price. Designating a specific amount gives objective value to risk.

The Economic Lesson

Prices convey information. Even if you had never heard of Bart, hearing his $250,000 insurance price tag would tell you that he was not your average bear.

An Economic Question: If you could, as a student, how might you insure yourself when you take a test?

Posted by: adminEcon
Tags: " Bart the Bear, "The Girl With the Dragon Tattoo, entertainment insurance, insurance markets, prices, risk, risky movies
Comments (0) Add a Comment