Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?

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Last week I was in Las Vegas with my boyfriend for one of his annual business conferences.  When it comes to travelling, I’m one of those extremely neurotic types who has to allow plenty of time for any and all “what if” situations, with the result that I usually end up at the airport the day before my flight (well, maybe that’s a bit of an exaggeration).  My boyfriend is just the opposite.  When he left the hotel for the airport (we were travelling separately), he said he allowed “plenty of time.”  However, there was a car accident on the way, which delayed his arrival.  He ended up at the checkout counter 43 minutes before his flight was scheduled to take off.  Unfortunately, if you check a bag at Las Vegas airport they require you to arrive at least 45 minutes before departure.  His bag was too large to carry on, so he was forced to wait until the next flight.

One could argue that it was his own fault for not leaving “enough” time to get to the airport.  On the other hand, this caused me to consider, yet again, all the costs (externalities) that some people’s actions impose on others.  To whit, the very next day I read about the scientist who prompted an evacuation of Miami International Airport for carrying what screeners believed was a pipe bomb, which is another perfect example of one person imposing costs on many other people.

I’m not even talking about the costs imposed by people engaged in the obviously illegal activities, such as terrorism, theft/burglary, homicide, etc., which clearly impose costs on law abiding citizens by leading them to lock their doors, install security systems, have to wait in line during security checks at airports, museums, etc.  What I’m talking about are the whole other set of costs associated with the actions that generally law abiding citizens take that unintentionally end up imposing costs on large numbers of others people, such as the person who causes an accident during rush hour, leading hundreds, if not thousands, of motorists to have to spend extra time sitting in traffic, or the idiot scientist who caused the evacuation of Miami Airport, leading thousands of people to delay or miss their flights.

The issue I’m thinking about is ordinary citizens’ failure to take due care when taking actions that could potentially affect many other people, such as when driving or flying.  The legal definition of due care is as follows:

Due care refers to the effort made by an ordinarily prudent or reasonable party to avoid harm to another, taking the circumstances into account. It refers to the level of judgment, care, prudence, determination, and activity that a person would reasonably be expected to do under particular circumstances. This standard is applied in a vast variety of contexts, whether the duty may be driving on the road or performing a background check. The precise definition is usually made on a case-by-case basis, judged upon the law and circumstances in each case.

At the heart of the matter is the fact that current penalties for these types of unintentionally caused problems consider only the private costs, and not the social costs associated with the problems.  That is, a driver who causes an accident must pay for any damage suffered by (himself and) the other driver (and potentially any infrastructure damage he causes).  However, the at-fault driver does not have to pay for the time costs imposed on all the other drivers on the road associated with the delays in traffic his accident causes.  Similarly, the traveler who unintentionally causes a delay or evacuation at the airport (oops! I forgot that I put that gun in my bag) may have to pay a fine for breaching airport security, but he does not have to pay the costs associated with the delay his breach imposes on fellow travelers.  As a case in point, the scientist who caused the evacuation at Miami Airport “was cooperative and permitted to continue his trip after questioning.”

Since individuals are not forced to pay these costs they impose on others, they have no incentive to take the extra care that would decrease the incidence of such problems.

There are a couple of difficulties associated with the most obvious solution of directly charging people for the costs they cause others.  First, there’s the problem of estimating what those social costs are – how many people were affected?  what are their time costs?  What are the costs associated with missing a flight? etc.

Second, most people wouldn’t be able to afford to pay these social costs themselves out-of-pocket, so an insurance market would probably spring up to deal with the issue.  However, if people were forced to buy insurance to cover such unintended social costs, then (1) that would simply end up as equivalent to a general tax on any individual who ventured out into public on a regular basis; and (2) if people were insured for such social costs, the moral hazard generally associated with having insurance would lead them to fail to take the due care originally intended by the policy.  Wikipedia defines moral hazard as follows:

Moral hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk.

Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.

Third, presumably the proceeds from any such fines would not go to reimburse (or make whole) the people upon whom the costs would actually be imposed.

Another potential solution is to impose harsh fines on people who cause problems with large social costs, such as revoking their driver’s license for causing an accident or revoking their right to fly for causing an airport evacuation.  The problem with this solution is that when making their decisions as to what level of care to take, people consider the expected costs of problematic behavior, not the absolute costs:

Expected Cost of Causing Accident = [Probability of Causing Accident] x [Cost of Accident]

Since most people put an extremely low probability on their causing an accident, even relatively harsh penalties will result in low expected costs of causing accidents, and thus end up not having much of an impact on getting people to take more care.

And of course, this solution would also not mitigate the costs suffered by affected individuals.

So what’s the answer?  How do we encourage people to take more care?

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