If we think about risk compensation in farming, the first thing that we might think about is crop insurance, and the perverse incentives and moral hazard associated with poorly designed crop insurance (I’ve written before about how GRIP solves this problem). But risk compensation in its most mainstream and interesting applications has to do with something different, largely because a risk compensating person isn’t individually optimizing.
When people are made safer by buckling seat belts, putting on helmets, and use other safety devices, they negate at least some of the benefits by behaving riskier; they drive or bike or ski faster and more aggressively. In a broad sense, here in a country in which the responsibility for personal injury is lifted from the individual and placed on product manufacturers, property owners, and others and injuries can be highly compensated, there is a similar effect of reducing sensitivity to injurious situations. Simply watch the way people lean on railings in countries where the property owner doesn’t have the threat of a lawsuit and a person injured in a railing failure isn’t likely to be highly rewarded. They examine the railing first. Or watch skiers outside the US pass over a blind ridge—they’ll stop and look to be sure they aren’t going off a cliff. Here the skier knows the resort would post a sign if there is a cliff, and makes a distinctly risky choice that negates some of the benefit of the fact that resorts in the US are more likely to post signs above cliffs.
A lot of effort and money has gone into safer farm machinery, safer working environments, and PPE. As we farmers come from a waste-not and humble culture, it comes with a bit of shame to think that perhaps we use less care than we did back when PTOs were uncovered, tractors didn’t have roll-over protection, much less seat belts, and in many other ways tremendous injury was a small slip or miscalculation away. It should also come as a bit of shame because we come from a culture that values hard work above all, or at least as a part of how we experience all other values, and risk compensation is all about laziness. Risk compensation has less to do with information and risk perception than other issues in behavioral economics. It has everything to do with a human weakness around reducing effort.
The bright side is that through self-awareness about the tendencies of risk compensation, we can make ourselves safer and gain the full benefits of a safer working environment. Moreover, we can extend the same thinking into business decisions, and here the benefits can be huge.