miércoles, 8 de junio de 2011

About risk aversion, motorcycles and discount factors

Economists assume that in general individuals are risk adverse by nature, that is they will prefer a certain outcome to a probabilistic scenario in which they might win or loose. There is an equation that allows to determine at which point individuals will rather play the game and risk their wellbeing and when they will not play and keep the safe outcome.

Over the past few days I have came to the realization that the level of risk aversion is not personal but geographical. Indeed it seems that in the developing world people  care less about the really bad outcome, taxis are inexistent here and all there is are motorcycles that drive like mad men everywhere. They usually have no permits, no helmets, the bikes are falling apart and they think they are running the Paris - Dakar (that is now in Argentina due to crazy motorcycles jumping in the track in the eurafrican side of the world...) and yet they are quite convenient. You just yell boda boda, tell him where you want to go and how much he will charge you (usually you try to halve the munzungu price). And you hop on in behind, grab something and expect that the very high rate of accidents that occur will hit the guy in front or behind you. But this is something I would never do in New York or in Mexico. 

So why do I do it? Is it because I value less my life when I am in Africa? Is it because there are not many other options? Is it because you figure that if that grandma can do it why shouldn't you? Is it thirst of adventure? Is it because it's super cheap? Is it plain stupid stupidity?

No matter why it turns out that foreigners tend to take more risks as the levels of development go down. Would it be the same the other way around? What if you teleported all Mbararians to the USA and offered them health insurance (assuming they could pay it without important sacrifices), would they purchase safety and peace of mind? Or would they culturally act different and not get the insurance?

Let's assume it is not a cultural decision. What if Ugandans in the USA bought insurance and United Statians (Because America IS a continent while Africa IS NOT a country) in Uganda would ride Boda Bodas. This would mean that there is something about the natural/social environment in the geographical locations that reduces the risk adversity of individuals.

If you've read this far you might say: "What is your point?"

My point is the following, economists are debating if acting again climate change is economically efficient. To decide if the investment in mitigation strategies are worth the effort, they are using the discount factor [see post], indeed a shilling today is worth more than a shilling tomorrow. So the discount factor is the extra amount you will have to increase my consumption in the future for me to sacrifice one unit of consumption in the present. Indeed we tend to value more the present than an uncertain future. So w\William Nordhaus and Lord Nicholas Stern, two important economists, have tried to evaluate the costs of action versus the costs of inaction in reference to the threat of climate change. Each one has set their own estimate for the discount factor and they have made extense calculations to try an emit a recommendation on the future of humanity. But if risk aversion changes from country to country and even inside a country, then probably the value of the present over the future is different inter and intra nationally. If different groups of people have different levels of discounting  the future across the globe. This means that economists are oversimplifying the issue at hand. Would it not be necessary to take the different discount factors, weight them according to population and then make an estimate of the result of the cost-benefit analysis to make this decision that will affect the whole world?

I guess most economical models need a little revamping into the era of mass data analysis so that many of the oversimplifications made because of a lack of computing power should be revisited to truly model the homo economicus complex system and try and find better tools to predict the future and make policy decisions.

This thoughts come to me as I come back from visiting the rural area where the project I will be working on is based. The area is really poor and I truly find myself revisiting my argumentations on sustainable development and poverty alleviation. The human specie is indeed complex and very simple at the same time, my conclusions are the same:
Ruhiira, Uganda. The green is Matoke/Plantain/PlatanoMacho, deforestation has been severe. Imagine no roads, no hospitals, no access to markets, no clean water, no sanitation, no schools, no nothing a couple of years ago...

1- We need to reduce population growth
2- We need to shift from non-renewable resources to renewable rational use of resources and improve efficient use of resources with technology and internalizing the social and environmental externalities of economic growth
3- We need to stop having blind faith in the market based approach and acknowledge that markets do tend to fail and lead to inefficient outcomes
4- We need to reduce inequalities in life opportunities amongst humans --- inter and intra country
5- We need to start valuing ecosystem services and protecting common goods

This guys were really excited to say hello. 
6- we need a new framework for planetary governance (UN revamp)

Tomorrow I promise I will finally explain what I am doing here and what exactly I will be working here.

Stay tuned...

1 comentario:

  1. Hey! You should check out the Microinsurance Innovation Facility, which does a lot of what you're talking about : assesses whether and why people buy insurance products and whether they are actually adding value in the developing world: http://www.ilo.org/public/english/employment/mifacility/

    My boss at EA is a frequent contributor :)

    Glad to hear you're doing well! Miss you!

    (As for me, you know I'm all for riding mototaxis, but only if I have a shiny red casco!)