Tim Harford, what about taxing the sin of excessive risk aversion instead of subsidizing it?

Sir, I refer to Tim Harford’s “These are the sins we should be taxing” March 12.

Mark Twain supposedly said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” And we used to mock or even abhor the risk aversion there implicit.

But then came regulators and with their risk weighted capital requirements; which allowed banks to leverage more the equity with the safe than with the risky; which allowed banks to earn higher expected risk adjusted returns on equity with the safe than with the risky; which was a de facto tax on risk taking and a de facto subsidy of risk aversion; they made it absolutely certain that Mark Twain was more correct than ever.

And that is indeed socially harmful. Not only does it block the access of “the risky” to bank credit, the SMEs and entrepreneurs, something that causes both more inequality and lesser economic sturdy growth.

But in order for this truth to sink in, so as to do something about it, we need that persons like the Undercover Economist understand the difference between the possible short-term costs of risk taking, and the truly high and certain long-term costs of risk aversion.

Just because something is perceived risky does not mean it is risky, sometimes it means, ex post, that it is quite safe. Make sure you really know what is what in risk and sins, before you tax it. ​Know your base rate J

@PerKurowski ©

What behavioral theory explains how hard it can be for even those who know it to understand?

Sir, Tim Harford discusses “base rate” and admonishes us:“It is easy to leap to conclusions about probability, but we should all form the habit of taking a step back instead. We should try to find out the base rate, or at least to guess what it might be. Without it, we’re building our analysis on empty foundations” “How to make good guesses” February 26.

So Mr. Harford: Clearly an asset that is evaluated as risky is normally expected to cause larger losses to a bank than an asset that is perceived as safe. But, what is the base rate for that a bank would create excessive exposures to what is ex ante perceived as risky? Is really what’s risky more dangerous to the bank system than what is perceived or has been deemed as safe? 

What sort of behaviorial explanation would Daniel Kahneman, Amos Tversky, Maya Bar-Hillel, Richard Nisbett, Eugene Borgida, Philip Tetlock and other experts give to the fact that a person like the Undercover Economist, even when in possession of the required knowledge, just cannot accept the fact that the pillar of our current bank regulations, the credit risk weighted capital requirements, is built upon a completely wrong foundation? 

@PerKurowski ©