Diminishing Returns And Perceived Risks

One of the most difficult concepts that many people have problems understanding is that of diminishing returns. This applies to many different areas in our lives and in our society. I don't know whether it's a lack of education, a failure in their upbringing, or something inherently lacking in the people themselves. Perhaps it's a little of all three.

Going hand in hand with this concept is one that has many of the same roots - perceived risk – something that has driven some folks into action to get the government to “Do Something!” about something that is a minor issue at best.

In case you're wondering, however briefly, how this particular subject came up, it was during a discussion at work about this post from FuturePundit dealing with the declining return on investment from electrical power efficiency.

My employer is always looking for ways to reduce our energy usage, something that appeals to the frugal Yankee in me. Over the past five or six years a number of measures have been taken to reduce our electrical usage, including the use of more efficient lighting at all levels, timers on our existing electric water heaters to shut them off when no one is in the building, on-demand water heaters replacing the older tank-type water heaters as they wear out, more energy efficient refrigerators (used for both food and for storage of certain manufacturing substances...though not in the same refrigerator!), and motion sensors to shut off lights in rooms when no one is in them, just to name a few of the improvements undertaken. All of this has helped reduce our electricity usage by over 20% as compared to 6 years ago. Will further investment reduce our electrical usage any more than it has? Sure it will, but (and it's a big 'but') we won't see anywhere near the savings we already have unless we spend a lot more money than has already been spent. We have reached the point of diminishing return. We'd need to spend many times more than we already have in order to achieve a small fraction of the savings already made. From a financial point of view the return on investment makes no sense, meaning further investment in this effort will not result in energy savings equal to what was spent to achieve them. Or put more simply, we'll spend more than we'll save. It's not worth it.

OK, back to the subject at hand.

We've seen more than a few times where some project has reached its original goals, whether it's a cleanup of some Superfund site or the closing of a municipal landfill. Ninety-nine point nine percent of the contaminants were cleaned up or the landfill might leak 0.001% of the liquids or decomposition products from the landfill. But for some folks that isn't good enough. They want 100%. Never mind that achieving that last little bit will cost as much, if not more, than what has already spent. Never mind that it will likely be the taxpayers footing the bill. Never mind that in the end it won't make one bit of difference. The project has blown past the point of diminishing returns and spending any additional money won't help...other than to make the folks bitching about it feel better. (It would be cheaper to give them some mood-elevating drugs to do that than wasting taxpayer dollars to 'fix' the last little iota of the problem.)

We see this lack of understanding about diminishing returns in all kinds of places and situations. It is also where the problem with perceived risk comes into play.

One of the biggest disservices ever perpetrated upon the public is the notion that life should be totally risk free. This meme started some time in the 1960's. (Yes, I know drives to improve safety started long before that, but the 100% risk free crap started in the late 60's/early 70's.) There's nothing wrong with reducing risk. But to think life can be made 100% risk free is ludicrous. It can't be done. But that doesn't stop people from trying to do so anyways. I wouldn't mind that so much if those same people understood the difference between real risk and perceived risk. The problem is that they don't and because of that lack of understanding money is wasted on slight risks while major risks are ignored.

An example:

Which entails more risk to life and limb: Driving a car or flying on a commercial airliner?

The answer is, of course, driving a car. (There were over 32,885 traffic fatalities in 2010, with many times that number of injuries. As an aside, that number is the lowest number of fatalities since 1949 despite more miles being traveled then ever before, giving us the lowest fatality rate ever.) But people perceive flying as more dangerous. Yet how many fatalities have there been in the US due to commercial airliner crashes over the past few years? None. A person is far more like to be injured or killed driving to or from the airport than they are by flying on a commercial airliner, but they're more afraid of dying in a plane crash. It's all perception, not reality.

Let's try another:

One person lives near a nuclear power plant. Another lives near a coal-fired power plant. Which one is at a higher risk of cancer, injury, or death?

The answer is the person living near the coal-fired plant. The effluvia from the smokestack and any runoff from the ash pile are a far greater hazard than anything coming from the nuclear plant under normal circumstances. Yet people perceive the nuclear power plant will cause them to get cancer and other illnesses. Even after the Three Mile Island accident there were no increases in cancer or other radiation related illnesses. (Some initial studies stated there were, but review of those studies by the CDC found some creative editing of the health statistics to 'prove' the case. Once all the raw data was reanalyzed those alleged increases in cancer cases disappeared.)

Over the years it seems to me the the perceived risks have received far more attention (and money) than actual risks. Efforts will be made to reduce risks that have little actual impact, but large risks will be ignored.

For instance, the NHTSA wants to ban the use of cell phones and other electronic devices by drivers of cars and trucks. All kinds of efforts are being made to codify that ban in to law across the nation despite the fact that the actual percentage of accidents caused by these distracting gizmos is unknown. The perception is that these devices are leaving a swath of death and destruction along the highways and byways of the nation to rival those caused by drunk driving. The NHTSA reports that 3092 traffic deaths were caused by distracted driving in 2010. That's one out of every eleven fatalities. How many of those were due to cell phone use or texting? The NHTSA doesn't actually say, though the article linked implies all of them were (but there was no actual number cited). The implication is that this is a major risk and that the government must “Do Something!' even though the actual risk is quite small.

But will the government spend a dime on something like removing homes from flood plains or barrier islands, obviating the need to constantly pay out to rebuild them again and again after they are destroyed? (Disclaimer: The gubmint did do that after the Mississippi River floods in 1993, relocating a number of towns to higher ground because it was cheaper to do so rather than paying out the flood insurance claims again and again and again and again, ad infinitum.)

Or will money be spent on things like crumbling roads and bridges, things that endanger us all? We must remember incidents like the Mianus River Bridge collapse on I-95 in Connecticut, the I-35 bridge collapse in Minneapolis, or the Nimitz Freeway collapse during the Loma Prieta earthquake in 1989 , all of which killed and injured motorists. (The Nimitz Freeway collapse occurred because necessary upgrades to the highway support pylons were postponed.) How many other others are out there waiting to happen because we haven't spent the necessary funds to reduce a very real risk? Maybe this is due to the opposite of perceived risk, where people see no risk and therefore think nothing needs to be done, yet the risk exists and is higher than many of the perceived risks people waste time and money dealing with. How much did these real incidents cost compared to what it would have cost to fix the problems in the first place? Do I really need to answer that?

The people need to learn how to discriminate between real risk and perceived risk, and to understand the relationship to diminishing returns. Otherwise we will continue to ignore real risks and waste ever more money on things that are minimal risks at best.