It is called the Peltzman Effect and it applies to the current economic meltdown.
Sam Peltzman is an economist. According to economists people respond to incentives. And people respond to incentives out of economic self-interest.
"The Peltzman effect arises when people adjust their behavior to a regulation in ways that counteract the intended effect of the regulation."
Peltzman's study was on the use of seat belts. The goal of seat belt laws was to save lives. According to Harvard Economist Mankiw" Seat belts make accidents less costly because they reduce the likelihood of injury or death. But the result is not fewer accidents or even fewer traffic fatalities, it is a larger number of accidents at higher speeds.
Interestingly, John Adams, risk expert and emeritus professor at University College London, showed that mandating seat belt usage in 18 countries "resulted in either no change or actually a net increase in road accident deaths."
"The point, stresses Adams, is that drivers who feel safe may actually increase the risk that they pose to other drivers, bicyclists, pedestrians and their own passengers (while an average of 80% of drivers buckle up, only 68% of their rear-seat passengers do)."
The New York featured an article titled, "Mathematical Model and the Mortgage Mess." It described using mathematical functions called Gaussian copulas. These copulas were a type of "produce scale that not only weighs a bag of apples but estimates the chances that they'll all be rotten in a week."
In other words, the use of these copulas reduced the perceived risk by homeowners, investors, and politicians, thus, increased the amount people were willing to wager.
People responded to incentives out of their own economic self-interest. The use of seat belts and copulas does not ultimately achieve the desired results -- fewer traffic deaths and zero-risk investing.
To me, it makes sense how and why we got where we are. We reduced our sense of risk to the point where we were willing to drive faster and more recklessly.
Buildings are expensive and not every person is able to buy it. But, business loans are created to aid people in such kind of hard situations.
Posted by: RossTraci | September 18, 2011 at 06:41 AM
YES.success grows out of struggles to overcome difficulties.
Posted by: Nike Shox | February 10, 2011 at 02:09 AM