Unintended consequences,
perverse effects, moral hazard

Unexpected results, good or bad surprises,
loopholes and free rides


Various systems, rules or decisions can bring counterproductive results
or "collateral" damages (perverse effects).

They might also include loopholes that opportunists rapidly use
for cheating and getting undeserved benefits (moral hazard).


Hell is paved with ...boomerangs

Unintended consequences , perverse effects

What is called "the law of unintended consequences" states that many
decisions, actions, norms and rules tend to bring unexpected results,
often
as
danger bad surprises and negative and counterproductive
side effects.

Such " perverse effects" can result from :
  • Either errors and a lack of anticipation (*) 
in the initial design and decision, even if it was prepared
with the best intentions.
  • Or unpredictable events
as most human activity fundamentally deal with complexity,
uncertainty and rapid changes.
(*) View the decision decision making and its traps article.
      Of course when
an emergency needs an immediate solution, to give
      a primacy
to action over anticipation can be understandable.

According to the famous " Murphy's Law " the toast often falls on the
side of the jam.
There are of course some more favorable cases in which " serendipity"
makes that an error brings benefits (some errors led to great discoveries).

Moral Hazard


The loopholes and bad temptations 

a system might include


Moral hazard (or moral risk) is the possibility for some opportunist people
or groups to obtain an poachunfair advantage, that might be harmful
to others, by using a flaw in a system

The system that is gamed this way can be :


* an unbalanced or frozen situation, or also a new one

* a business or human organization,

* a regulation,

* a contract type (notably an insurance contract),

* a type of allowance or benefit,

* the supply of under priced or free goods / services.

* and so on.

Well known cases are free riding, cheating, poaching, abuse of rights,
pilfering, stowaway, threshold effect,
overuse or waste of free or nearly
free resources.

But, just a moment, Torquemada, should all those not too fair behaviors
be condemned without exception?
  • Sometimes it's in good faith 
that people use the vulnerabilities of a system for their benefit. It
can even be under the idea that it compensates an injustice or an
excessive disadvantage.
  • Buts sometimes a dishonest, abusive or uncivil behavior is obvious.

The case of economics, management and finance

A well-known case in management is too generous bonuses as
rewards for achieving some performance goal objectives, usually
quantitative ones.

If this reward system is designed in a sillymad "wild" way, it can lead (see
bank traders bonuses) to focus on short term results, to neglect caring
for the long term, to try highly risk risky "big deals" and even to
engage into frankly dishonest deals.

=>
We may then speak of " perverse incentives ".
"As this is not my own money,
  * if it works, I pocket a good slice of the profit,
  * if it fails, those who brought the money will take the loss."
To take another example, a public policy of easy money has brought
 lever overleverage and favored the financial sphere (finanzialisation)
over the economic sphere
, and the damage that goes with those
unbalances.

Financial rescues themselves might backfire
as the opportunist
who gamed the system followed by some imitators) would conclude:
"Why I would not do it again as I will be rescued if things go wrong" .

Economists call "negative externalities" the nuisances that some
activities of a company or an institution bring to other people while
satisfying its own interests. The equivalent of military "collateral
damages"

True and false countermeasures

Straitjacket ? Full flexibility ?
Or sliding the cursor to the middle?

Reasonable anticipation, OK!

If at least the most probable and massive "tempting" behaviors
were not anticipated, it is as if the decision or system was meant to favor
them.

Or maybe ...it was intentional (as "special interest" lobbies might have
succeeded in obtaining regulations that are biased in their favor), but this
is not always the case.

If the person or entity responsible for designing and operating the system
did not install safety / orecaut safeguard, from the start or, as not all loopholes can
be foreseen, at least once a serious distortion arose, incompetence and
negligence
can be suspected, even if the intentions were honorable
(Conscience without science ...),

Aside the ethical sense expected from the users, protections are done by
telescope anticipating and monitoring in a way that is designed to
prevent or stop any overflow.

Over anticipation and rigidity, no!

On the other hand such protections might become perverse in themselves
as is the case of an overreliance in regulations or an overuse of
the precautionary principle
as seen below.


To raise too many foolproof barriers leads to a lack of flexibility and an
illusion of safety.
  • Regulations that are too narrow or rigid
They can create new vulnerabilities by enabling the
smartest players to circumvent them, or inciting to
corruption so as to get  privileges.

Of course too vague regulations are not real regulations and
they rest on good faith and ...smart vigilance by empowered
watchers.
  • Such hyper-regulation might also block evolutions
and shatter initiatives.
It could also reveal itself unenforceable, or non'understandable
in its complexities.
It can quickly become obsolete when facing changes,
unless it is constantly revised, something which undermines the
legal visibility and discourages the initiative again.
  • For example, the sacrosanct precautionary principle
when driven to an extreme.
It is based on the illusion that we can avoid all risks and it can end
up in condemning
all innovations, since by nature it is impossible
to know, even after serious
testing ("right to experiment"), the
ultimate effects of entirely
new things .
If we follow the paradox to its end, past innovations would
be banned, since everyone knows the damage still caused
everyday by the wheel and the fire, how devilish!. ;-).


Back to collection: economic articles migrated from Knol
Back to collection: decision psychology articles migrated from Knol


Pageviews for this article before migration from Knol: 1.7 k


M.a.j. / updated : 08 Aug. 2015
All my ex-knols / Tous mes ex knols 
Disclaimer / Avertissement légal

This site tracked by OneStat.com. Get your own free site tracker.