Quotulatiousness

October 26, 2011

Mis-perception of relative risks

Filed under: Football, Health, Randomness — Tags: , , , — Nicholas @ 00:03

Gregg Easterbrook provides a good example of how difficult people often find to discern the relative weight of risks:

The first consideration is that both absolute numbers of football deaths and rates of death compared to participants are in long-term decline — mirroring the decline in many forms of risk in society. Age-adjusted rates of all deaths in the United States have declined for 10 consecutive years. Auto fatalities have been declining for more than a generation. Winning the War on War, an important new book by Joshua Goldstein [. . .] shows that despite the impression created by cable news, exposure to violence is in decline both in the United States and worldwide.

[. . .]

Data from the National Center for Catastrophic Sport Injury Research reflects a steady decline in deaths caused by football. Table 1 of the center’s most recent report shows that in the past decade, 34 high school, three pro and two college football players have died as the direct result of games or practices, with the primary cause of deaths being heat stroke. That is entirely awful — but much lower than the rate of a generation ago. In 1968 alone, 26 high school players died as a direct result of football; last year, the number was two. Table 3 of the report shows the direct fatality rate from high school football peaked at 2.6 deaths per 100,000 players in 1969 and declined steadily to 0.13 deaths per 100,000 in 2010. That means a 1968 high school football player was 20 times more likely to die than a 2010 player. (The main reason for declining deaths was that football helmets were improved to eliminate skull fractures.)

[. . .]

How to compare the slight risk of a terrible football outcome to other common risks experienced by the young? Consider the risk of being in a car. About 3,000 teens die each year in car crashes. There are about 21.3 million Americans between 15 and 19 years of age. Teens average about 146 miles driven per week, roughly 150 hours per year of driving. These figures yield a roughly one in 1 million chance that a teen will die in an hour of driving. The National Federation of State High School Associations reports that 1.1 million boys (and a few girls) played high school football last academic year. A typical high school football season would include, in games and practice, perhaps 75 hours of exposure to contact. That’s about 80 million total hours of exposure to contact on the part of high school football players. The National Center for Catastrophic Sport Injury Research reports a recent average of three deaths per year directly caused by high school football. That’s a roughly one in 27 million chance of a high school player dying from an hour of football contact.

These are all rough estimates. Taking them together, a teenager has a one in 1 million chance of dying in an hour behind the wheel, compared to a one in 27 million chance of dying in an hour of football contact. Being in pads on a football field is less deadly than driving to high school for class. Many contemporary parents, especially moms, might say, “I don’t want you playing football because it’s so dangerous, but it’s fine for you to drive to the mall.” As regards mortality, this misperceives the risks.

September 5, 2011

False ideas about investment risk

Filed under: Economics — Tags: , , , , — Nicholas @ 10:25

Dan Ariely points out that most people have no idea at all about some of the key questions on investment risks:

To this point, we’ve run a number of experiments. In one study, we asked people the same question that financial advisors ask: How much of your final salary will you need in retirement? The common answer was 75 percent. But when we asked how they came up with this figure, the most common refrain turned out to be that that’s what they thought they should answer. And when we probed further and asked where they got this advice, we found that most people heard this from the financial industry. Sort of like two months salary for an engagement ring and one-third of your income for housing, 75 percent was the rule of thumb that they had heard from financial advisors. You see the circularity and the inanity: Financial advisors are asking a question that their customers rely on them for the answer. So what’s the point of the question?!

In our study, we then took a different approach and instead asked people: How do you want to live in retirement? Where do you want to live? What activities you want to engage in? And similar questions geared to assess the quality of life that people expected in retirement. We then took these answers and itemized them, pricing out their retirement based on the things that people said they’d want to do and have in their retirement. Using these calculations, we found that these people (who told us that they will need 75% of their salary) would actually need 135 percent of their final income to live in the way that they want to in retirement. If you think about it, this should not be very surprising: If you add 8 hours (or more) of free time to someone’s day, they will probably not want to spend this extra time by going for long walks on the beach and watching TV — instead they may want to engage in activities that cost money.

You can see why I’m confused about the one-percent-of-assets-under-management business model: Why pay someone to create a portfolio that’s 60 percent too low in its estimation?

And 60% is if you get the risk calculation right. But it turns out the second question is equally problematic. To show this, we also asked people to tell us how much risk they were willing to take with their money, on a ten-point scale. For some people we gave a scale that ranges from 100% in cash on the low end of the risk scale and 85% in stocks and 15% in bonds on the high end of the risk scale. For other people we gave a scale that ranges from 100% in bonds on the low end of the risk scale and buying only derivatives on the high end of the risk scale. And what did we find? People basically looked at the scale and said to themselves “I am a slightly above the mean risk-taker, so let me mark the scale at 6 or 7.” Or they said to themselves “I am a slightly below the mean risk-taker, so let me mark the scale at 4 or 5.” In essence, people have no idea what their risk attitude is, and if they are given different types of scales they end up reporting their risk attitude to be very different.

July 12, 2011

Have the markets already “priced in” the risk of a US government default?

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 11:48

Along with everyone else, I’ve been watching the US government’s fiscal game of “chicken” with some alarm. What is puzzling is that the opposition in congress doesn’t seem to be all that scared by the risk of default:

The facts, in fact, are plain enough. In the unlikely event that the U.S. government would hit the real ceiling on August 2 as advertised, the federal government would still be on track to collect about $2.2 trillion in the fiscal year. That wouldn’t change. And net interest for the year would still be about $205 billion, or less than a tenth of incoming revenues. And in light of the consequences, there is no doubt that President Obama and his Treasury Secretary would ensure that the interest payments are made on time and in full.

Thus it should not be surprising, as Fox Business News senior correspondent Charlie Gasparino wrote in a New York Post piece some days ago that “just about every private-sector economist I speak to says that Treasury could simply use its ample cash on hand to pay off our creditors first—then begin to prioritize payments for the military and various social programs.”

This view appears to be shared in spades by the credit markets, which so far have reacted to the Obama-media scare tactics with a big yawn. When the markets fear real default, they respond by jacking up interest rates, as we’ve seen in Greece, Italy, Portugal, etc. It’s happening right now in those countries.

In sharp contrast, U.S. long-term rates are actually falling. The 10-year Treasury bond rate, which only a few days ago was around 3.15 percent, has dropped 20 basis points to 2.95 percent. Maybe the markets just aren’t paying attention. Or maybe they know Obama and Company are blowing smoke. Whether the debt ceiling is raised on time or not, markets are confident that the interest will be paid.

June 1, 2011

New report from the Obviousness Bureau: TEPCO underestimated earthquake/tsunami risks

Filed under: Bureaucracy, Japan, Technology — Tags: , , , , , — Nicholas @ 07:55

Hands up, anyone who didn’t see this coming? Okay, put your hands down board members of TEPCO:

Japan underestimated the risk of a tsunami hitting a nuclear power plant, the UN nuclear energy agency has said.

However, the response to the nuclear crisis that followed the 11 March quake and tsunami was “exemplary”, it said.

The Fukushima Daiichi nuclear plant, which was badly damaged by the tsunami, is still leaking radiation.

Japan’s Prime Minister Naoto Kan is facing a no-confidence vote submitted by three opposition parties over his handling of the crisis.

They say he lacks the ability to lead rebuilding efforts and to end the crisis at the Fukushima plant, public broadcaster NHK reported.

Some politicians from Mr Kan’s governing Democratic Party of Japan (DPJ), including former Prime Minister Yukio Hatoyama, are backing the motion.

If it is passed in a vote expected on Thursday, Mr Kan would be forced to resign or call a snap election.

However, given the thousands of dead and missing from the earthquake and tsunami, the attention paid to Fukushima has been rather disproportional. As someone joked yesterday, radiation from Fukushima has killed fewer people (none) than e.coli tainted food in Germany (16 at last report).

Update: In case I’m being too obscure, the “this” I refer to in the initial paragraph is the with-the-benefit-of-hindsight conclusion that the Fukushima plant was inadequately prepared for the earthquake and subsequent tsunami.

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