Friday, April 8, 2011

Joseph Stiglitz: "These people have an incentive not to see things accurately."

Joseph Stiglitz on Democracy Now! compares those two meltdowns: the ongoing nuclear situation and the financial one.

Here's excerpt from the rush transcript.

JOSEPH STIGLITZ: Yeah. Well, I just wrote an interesting article making a comparison between our ability to judge what are called small probability events, you know, rare—events that are supposed to be rare—those in the financial market said that the kind of collapse that we had should happen once in a thousand years, once in the history of the universe. But we had a collapse in the 1980s, we had a problem in the 1990s, we have them every 10 years. And that shows the models are very bad, our ability to judge rare events is very bad. Now, a lot of research in behavioral economics and psychology have explained why it is that these events that don’t happen very much, we don’t have a lot of experience.

But one of the points that I raised was that these people have an incentive not to see things accurately. You know, the nuclear power industry has an incentive to tell everybody, "Oh, don’t worry. Nothing—no risk there." The financial sector had an incentive to say, "Don’t worry about these derivatives, even if they’re already a quadrillion dollars. Don’t worry, because we can manage that risk. We have systems of diversifying the risk across the economy." Clearly wrong. So, you know, when there’s so much money at stake, people have a way of seeing—of discounting these risks, especially because those risks are borne by everybody else in our society.

And, you know, nuclear power is a really interesting case, because that industry has never been commercially viable. It has always existed on the back of a government-provided insurance, that we provide as taxpayers, that they don’t pay for. And we see now in Japan that, you know, they did the same thing, and we see the cost of that. The rest of society is paying an enormous price. There is no way that the slight savings in energy cost can make up for the loss to the Japanese economy that has resulted from the nuclear explosion. And the same thing could happen here in the United States.

"An interesting article" is here and also here.

Experts in both the nuclear and finance industries assured us that new technology had all but eliminated the risk of catastrophe. Events proved them wrong: not only did the risks exist, but their consequences were so enormous that they easily erased all the supposed benefits of the systems that industry leaders promoted.

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