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On Markets and Complexity
Topic: Economics 12:05 pm EDT, Apr  2, 2008

Robert C. Merton, founder of Long Term Capital Management:

Let me give you this analogy. If you're driving in inclement weather, you'd say that a four-wheel-drive car is safer than a two-wheel-drive car. Now suppose that we observed that over the last 15 years, the number of passenger accidents per passenger mile driven hadn't changed at all. And someone says, Now wait a minute: Has four-wheel drive made us safer? And the answer would be, Technically, no, because we're having just the same number of accidents we used to have. So, was this all a waste, or were we wrong? I think you know the answer, as I do. What really happened is that people get something that will unambiguously make you safer if you behave the same way you did before. That's the key element to understand first. The amount of risk we take personally, individually, or collectively is not a physical given constant. We choose it. What happens is, we look at some new, safer instrument and we say, Yes, we could be safer doing the same thing. Or, we could take the same amount of risk and do things that were too risky to do before. So with a four-wheel-drive car, you look out the window and see six inches of snow, and you say, That's okay: I'm going to go over and visit my family. So the question to ask is not, Are we safer? The question to ask is, Are we better off?

On Markets and Complexity



 
 
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