The 1% Doctrine: Evaluating Risk

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I’ve been struck by several recent and current policy decisions that involve high risk and (perhaps) low probability.

Cheney and the Threat of Nuclear Terrorism

The first such policy to catch my attention was the statement attributed to George Tenet and an un-named briefer in a briefing to then Vice President Cheney in Ron Suskind’s book: (google books)

If there’s a 1 percent chance that Pakistani scientists are helping al-Qaida build or develop a nuclear weapon, we have to treat it as a certainty, in terms of our response,’ Cheney said. He paused to assess his declaration. ‘It’s not about our analysis or finding a preponderance of evidence,’ he added. ‘It’s about our response.

This type of threat is described by Cheney as a “low probability, high impact event”

Pascal’s Wager: the Chance of Heaven

At the time I saw it as a parallel to Pascal’s Wager, roughly stated:

Even if there is only a small chance of God’s existence, one ought to act as a believer, because the cost is finite and the reward is  potentially infinite (heaven).

To paraphrase Cheney, this is an “uncertain but high impact wager.”

Investing: Value at Risk

The next high stakes decision to strike me was the risk anlaysis of potential losses caused by borrowing money (30-1) and betting that home values would not decline nation-wide.

The technique to estimate the risk involved in these complex transactions is called Value at risk. Value at
Risk (VaR) estimates the highest loss that is likely to occur in a given time frame.

Think of this as a:

  • 100 year hurricane, or
  • 500 year flood

The odds of these events happening in a given year are 1 in 100 and 1 in 500 respectively.

Value at risk is a way of calculating a similar loss to a financial asset. Two common VaR metrics are 1% Var and 5% Var, the maximum likelihood that an asset will loose value 1% and 5% of the time.

Thus, if I were selling you an asset with a one day 5% Var of $1 million, there is a 95 percent chance that any asset loss will be less than $1 million dollars on any given day. Restated, 1 day out of 20 will likely result in a loss of $1 million.

Value at risk was pioneered at JPMorgan, and then picked up by others. Eventually the federal government required that firms calculate a VaR and submit it to regulators. This resulted in the practice becoming widespread, and it started to be used for the opposite purpose that it was designed. Rather than serving as an aid tohuman intuition, as Goldman Sachs did, VaR became a crutch that obviated the need for human risk analysis and it produced a number that led firms to a false feeling of confidence.

Nassim Taleb, one of the biggest critics of Value at risk argues that “unlikely events” happen more often than our perception of probabilities, and when they do, their magnitude is greater than the dollar value stated by
Value at risk.

Put another way, for a 1% VaR of $1 million dollars, one percent of the time the least you stand to loose is $1 million dollars, with the potential that it could be much worse–it could bankrupt your company and overflow into the wider economy. Value at Risk does not really help you prepare for the 1%.

Climate Change

In the case of climate change, I have heard of no such VaR. I have heard about some of the risks:

My assumption is that the risk is greater than 1%, 5%, or even 20%.

One “conservative” argument is that the cost of action is high and the likelihood of success is unknown. Until the likelihood is better known or there is a promising solution that is likely to yield the cooperation of all other interested parties, no American action should be taken.

What Guides Action?

In these four cases, we’ve seen widely divergent approaches to action, and it may have something to do with the amount of sacrifice required and the perception of the likely success.

  • Cheney: Dire Warning: the risk is higher than the cost.
  • Pascal: the reward is so high that is is worth it.
  • Wall Street: a 1% risk is unlikely and success is measured quarterly
  • Climate Change: “conservative” Americans don’t act when the costs are high and success uncertain.

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Supply-Sided Environmentalism

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Tax Cuts: a Virtuous Cycle

One of the most appealing things about supply-sided economics is that its proponents describe a feedback loop that transforms taxcuts, which are commonly thought of as “costing money”, into a source of new revenue (when measured through a larger economic base).

Energy Efficiency: a Virtuous Cycle

Though their isn’t anything “supply”-based about some environmentalist’s proposals for increased energy efficiency, is see an interesting parallel.

Increased Energy efficiency is normally thought of as an increasing cost to get a reduced benefit. Think of home insulation and improved windows.

Improved windows and more insulation cost more money; and as the desired energy savings increases, the cost increases, so as to be of diminishing value.

Credit: Natural Capitalism

Like the supply siders, Amory Lovins looks for circumstances in which evaluations of individual actions within the traditional model don’t hold true for their effect on the system as a whole.

If Lovins were building a home, he would measure the future savings from the improved insulation and windows, but he would not stop there. Instead, he would analyze the effect of those savings on other parts of the
system.

Would the improved insulation and windows allow him to buy a smaller furnace and air conditioning unit? If so, he could take the savings from the air conditioning unit and furnace and plow it back into even better windows and insulation. Perhaps he would spend the money on more design, so that the south side of
the house would take better advantage of passive heating principles. Lovins would continue to iterate through this process, continually looking to pass on savings to other parts of the system.

Tunneling Through the Costs

Lovins describes his technique as “tunneling through the costs”, where he takes a graph for which cost-effectiveness has seemly been maximized, and demonstrates that higher energy saving can be advanced by eliminating one of the system’s assumptions, such as reducing or eliminating the heating or cooling system.

The New York Times ran a story recently about Passive Solar Houses in Germany in which the the need for a
furnace had been reduced or eliminated, freeing up money to be put to alternate uses.

Time magazine recently ran a cover story titled “America’s Untapped Energy Resource: Boosting Efficiency“.

It seems that the concept of reducing costs by optimizing an entire system would be attractive to many people; and unlike supply-sided economics, its effectiveness should be testable on the small scale.

Note:

For those who have an unfavorable view of “supply-sided” economics, I’m not trying to disparage Amory Lovin’s approach. The actual benefit of taxcuts can be debated. Rather, I think it would be interesting for those who like the idea of supply sided economics to consider the practicality of “Tunneling through” barriers to efficiency.

Is Oil A National Security Issue?

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In an interview with two former Secretaries of State, Charlie Rose asked the question “Is oil a national security issue?”.

It is interesting that both said yes, and specifically the way that James Baker described how it has been recognized as official policy for at least 3 of the 4 presidents he served under.

Charlie Rose: “..Most people now consider it, with oil now at $140 a barrel, a national security issue. Do you?..

Warren Christoper: Oh, there is no doubt that our energy is a national security issue and will be for a long time ahead..

James Baker: “Energy has been a national security priority for a long time Charlie. I served in 4 administrations and I know for a fact that in 3 of those we had national security decision directives that said we would go to war in effect to protect our access to the energy reserves of the Middle East and and we in effect did that at one point..”

  • Charlie Raises the Question: 27:10
  • James Baker’s Response: 27:57-28:47
  • Carter Doctrine

Bike Light Review: Dinotte 600L headlight and taillight

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One of the things I really like about the web is doing research and finding products and companies that are doing a good job. Negative reviews “exposing” bad stuff can help you avoid making a mistake, but the positive reviews are the most helpful because they give you confidence that you’ve found a decent option. It’s with this spirit in mind that I share with you my experience with the Dinottee 600L headlight and taillight.

I first was drawn to the Dinotte line of lights by reviews of their taillight –which was described as the brightest available.

EXTREMELY bright. There is no way a car won’t see you. This tail light is far and away the brightest, most attention-getting example I have seen. The instructions even caution you to mount it to prevent aiming it directly at the drivers behind you! After years of wondering if the cars coming up behind me actually notice my tail

light, I now have confidence they do. What a great feeling!

This tail light is unbelieveably bright!

People have told me that at several hundred yards it still looks “like a star or constellation”

You won’t be disappointed with the brightness and there is no reason I can think of why you would need a brighter taillight, although Dinotte does make a ~600 lumen taillight.

The biggest downside to this light is cost, but I’m of the belief that if cyclists want to be treated as vehicles, they should make an effort to be visible at night. For a commuter, think of it as insurance. These lights will probably
come down in price over the next few years as LED technology improves. The Dinnote package is one of the first lights that performs like a bike light should.

The second potential downside is mounting options. I have a rack on the back of my bike and my bag blocks the normal seapost mount that Dinotte includes in their package.

I did a little bit of research and built myself a saddle mount for my light. It’s based on a MinouraSBH-300 water bottle cage holder that mas been sawed off below the first screw hole. A 1 inch thick PVC pipe (less than $.50) is screwed into the top water bottle mounts, creating a very solid mounting platform.
This design will not work if your seat isn’t very high above your bag.
(For a rack option, see further below)

The 600L headlight is also very bright. The first night I got it, I charged it up, used it for 10-15 minutes as recommended, charged it again, used it for 1 hour, and then charged it fully.

I was experimenting with the blink mode as I was riding and watching the speed limit signs 200 meters ahead flash in the distance. My father happend to be walking through town and thought he saw police flashers coming from around the bend in the road. I now only use flash mode when it is dusk; otherwise I think I’m beyond the point of visibility and becoming more of a distraction.

The big advantance of the 600L over HID and halogen systems is the battery life — 3.5 hours on high and 7 hours on medium with the lithium ion batteries. Bulb life is also a big advantage– LED bulbs typically last thousands of hours and are less vulnerable to breakage. Medium brightness is plenty bright for typical road riding, but the battery time is long enough that I’m able to use the high beam for my commute to work (19 miles each way). One time after an extra long day, I forgot to charge my batteries and I still made it through the second day (I used flash mode a lot because it was slightly after dawn and just before dusk).

One of the questions I had when ordering the headlight was whether the beam pattern would be wide enough to take a steap downhill S-turn that is part of my route. I considered the wide lens option, but their excellent support guy, Rob, counseled against it for the road. I took that S-turn at 25 mph one night during a new moon and I was impressed. I have no need for the wide lens, although it is option for mountain bike riders.

Batteries: I chose the 4 cell lithium ion batteries. They are quite small, and I’d go with the 4 cell option unless you’re mounting the light and battery both to your helmet, rather than the bike. (Helmet mounting is an option I haven’t tried). I debated going with rechargable AA batteries, but I’m glad I chose the lithium ion. The run time is much longer and you can run both lights off of a single battery or use two batteries. If you carry your connector cord and one of your batteries runs out, you could run both lights off the second battery. One thing you might also consider is buying a second charger — that way you can run both lights on their own battery and charge both overnight with their own charger. It only takes 4 hours to charge, but it’s nice not to have to remember to switch batteries later in the evening. You’ll notice that the batteries mount to the tob tube or seat tube with velcro straps. It’s very convenient to recharge them — just detach the cord from the light, unvelcro the battery from the tube and connect to the charger. You’ll notice the cord doesn’t unplug from the light very easily, but that’s a good thing. My mom’s earlier light tended to loose its connection periodically as she rode.

I was so impressed with my lights that I got together with my brother and dad to get my mom a new set. We had to devise an alternate rack mount for her because she has a rack-mounted bag and her seat isn’t as high as mine. Fortunately we were able to mount another trusty PCV pipe on the back of her Trek 520 rack. It’s just a 4 or 5 inch long piece of PVC pipe with a slit cut in it. My brother packed it full of rubber strips from an old bike tire. We drilled holes in it and secured it to the rack with an old shoe lace. It’s not going to win any design awards, but with the help of the animated knots website, we were able to tie some sort of knot to keep it in place.

I’m the type of person who likes to open the box and start using my new purchase right away. I had scanned the directions (available online before you buy), but I hadn’t fully read them. It took me about 3 minutes to realize that my superficial reading was inadequate to correctly cycle between the light modes and to turn the light on and off. I went back inside and read the directions again. Ahah! To turn it on, click the left button twice!

When you first receive your light, you may find yourself seeking out the darkest country roads and alleys in your town. The night after I recieved my mom’s light, I was running it through it’s initial charging process,
when I thought I saw a black cat cross the road in front of me in the distance. I’m not superstitious, so even though the “cat” was on the right hand shoulder, I was about to continue on. But as I got closer, I realized that the “cat” was actually a skunk!

With a lesser light, I might not have detected the difference until it was too late. I slowed down dramatically, rode on the other side of the road, and continued on my way. There’s more than cars and branches to look out for at night!

Alternatives: I don’t know of anything comporable to the tail light. I have a Cateye LT1000 that I’m thinking of mounting as a backup, but it doesn’t compare in brightness. For the headlight, the NightRider TriNewt is a
bright LED (500 lumens) that lasts a long time. If the Dinotte were unavailable, I would consider it, but the Dinotte is brighter (at least by spec: 600 lumens), the same price, and the lithium ion batteries can be swapped or shared with the tail light. For a cheaper headlight, I’d consider the 200 L. I haven’t tried it, but its probably pretty bright as well.

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