Monday, December 24, 2012

Underinvesting in resilience

There are two distinct and crucial components of disaster preparedness. The one that understandably gets the most attention is the capacity to mount a rapid and effective response. 

In a chaotic collapse speed is more important, it is a short time high energy situation where preventing more collapses and tipping points is more important.

The second component comprises investments that minimize the expected damage to the economy.

This is a V-Bi aspect, by making infrastructure more resilient and elastic they are less likely to crack and reach tipping points chaotically. Insurance often does this.

The cost of this power failure, though difficult to calculate, is surely huge. Unlike the economic boost that may occur from recovery spending to restore damaged physical assets, this is a deadweight loss. Local power outages may be unavoidable, but one can create grids that are less vulnerable – and less prone to bringing large parts of the economy to a halt – by building in redundancy.

Like a dead weight on something fragile, this can cause cracks and collapses. Every kind of economic structure has deadweight on it as well as an uplifting force or deadlift. A V-Bi approach is to randomize the system rather than having lines of Iv branches and B roots where if one part breaks the rest losing connectivity and starts to die off from a lack of resources. In the GFC there were deadweight losses in the sense of downward pressures on the Iv-B economy that caused it to collapse like the uplifting forces or deadlift of carry trade loans causes the bubble to inflate. Both are chaotic and prone to causing cracks  in an economy. 

For example a deadweight on a house in a hurricane might be a tree that causes it to collapse, a deadlift is where the wind gets under the roof and rips it off. In a boom a deadlift can be where Iv-B investors rushing in tear the roof or market price of houses away from their foundations causing them to raise, then collapse when the upward force is spent and there are no longer any foundations under it.

One argument is that redundancy looks like waste in normal times, with cost-benefit calculations ruling out higher investment. That seems clearly wrong: Numerous expert estimates indicate that built-in redundancy pays off unless one assigns unrealistically low probabilities to disruptive events.
That leads to a second and more plausible explanation, which is psychological and behavioral in character. We have a tendency to underestimate both the probabilities and consequences of what in the investment world are called “left-tailed events.”

Iv-B systems waste fewer resources by using leverage, for example the Iv branches and B roots of a tree use little wood for their size and what they do. However they are also easier to crack and collapse the thinner they get, a system constantly growing more and thinner branches will eventually collapse under the energy of a chaotic event like a storm. There is a fundamental uncertainty in predictions, chaos does not fit on a normal curve at all and is just the tails. On a normal curve then towards the center events are random and towards the tails more chaotic and so a normal curve cannot predict these chaotic tails as the mathematics changes.

Offsetting Behaviour: In praise of price gouging, revisited

Offsetting Behaviour: In praise of price gouging, revisited

"Ely argues that we can have cases where supply is effectively fixed. Consequently, the only gains we get via gouging are in ensuring that goods are allocated to their highest valued use; we don't get increased supply. In that case, we weigh the gains from improved allocation against the losses to inframarginal consumers who have to pay more."

A natural disaster is usually a Roy situation, the goal is then to minimize costs and losses not maximize profits. This becomes predator and prey, whoever minimizes their costs has the greatest chance of coming through the disaster ok. Consumer surplus is being Ro-R prey, for example an R gazelle has consumer surplus or prey surplus when it survives getting gouged by the claws of a predator. The predator surplus is where they catch more than they expected, in nature neither predator nor prey is better than the other but both still must struggle. Picking winners in such a situation should be on the basis of justice. 

After the February 2011 earthquake, we were in a zero-supply-elasticity world for a few goods, most notably petrol. More petrol was coming, but it wasn't going to be here for a few days. All of the petrol stations on the east side of town were out of commission due to power outages; it was very hard to figure out where you'd be able to find a petrol station with power if you lived in the east. Worse, because everyone knew that petrol was scarce, everyone panicked. If you had a car with half a tank, you filled it up. If you had two cars, you made sure both tanks were full. If you had empty jerry-cans, you filled those up too. 

A natural disaster is Oy-R chaotic, prices tend to be brittle rather than elastic. Hoarding is a logical idea because it minimizes the risk of loss from running out of a fuel, there is no real desire to maximize profits.

There were no laws against price gouging. But the petrol stations knew that every single customer would hate them if they were the only station to let prices rise such that supply and demand came back into equilibrium. And so because the stations didn't gouge, we were in a terrible equilibrium where everyone's rational response to the below-clearing price was to hoard, because there was real risk that the stations would run out of fuel. And there was real risk of running out of fuel because of the hoarding. Breaking the hoarding equilibrium would have required a coordinated price hike that both allocated fuel to its highest valued uses and told everyone that there would be fuel available for them in an emergency if they really really needed it. 

Petrol stations have to either use a cooperative strategy or a competitive one, if they cooperate in helping customers they gamble those customers will cooperate in giving them more business later rather than free riding and going elsewhere later. The normal center is that petrol stations help out their customers by quenching chaos and then customers help back by letting the petrol station recover its losses. The hoarding equilibrium is Roy, people thinking of minimizing risk, emergency fuel is an insurance based V-Bi and Y-Ro strategy like emergency funds from an insurance company preventing more damage and claims later.

I really think Ely is underestimating just how much value there can be in getting to the right allocative solution, and how a good dose of gouging can break hoarding equilibria.

Gouging is chaotic and there is no allocative solution or equilibrium, just movements between booms and busts. This gouging breaks the normal center or equilibria of cooperation.