So there I was, thinking about how I was going to start this blog post; I'd been meaning to compare investing to Smeed's Law — a behavioral theory that predicts the rate of traffic fatalities — for a while. Determined to come up with something vaguely witty and quasi-relevant to kick off this post, I sat in my car for a moment before going into the 7-Eleven for my morning Double-Gulp when — WHAM! — it hit me!
I mean, really, it hit me … some cat driving an Audi A4 ran into me in the parking lot. Seriously, dude?!? Who runs into a parked car?!? Oh well, as Old Man O'Malley used to say through the fog of cigar smoke encircling his head: "some days youse da dog and odders youse da hydrant." Today was shaping up to be a hydrant day, for sure . . .
Anyhow, back to traffic. There was this great retrospective by physicist Freeman Dyson a while back in Tech Review. In it, he talks a bit about the things he learned from his old friend, RJ Smeed. Among many other contributions, Smeed had postulated that deaths on the roads had little to do with speed limits, car safety features, quality of the roads, etc. Instead, motorway mortality was a function of psychology. Dyson said it best:
"The number of deaths is determined mainly by psychological factors that
are independent of material circumstances. People will drive recklessly
until the number of deaths reaches the maximum they can tolerate. When
the number exceeds that limit, they drive more carefully. Smeed's Law
merely defines the number of deaths that we find psychologically
And it seems to me that we're running a great test case of Smeed's Law: cell phones in cars. Now, the nervous Nellies would tell us that gabbing while driving distracts people to a dangerous degree; I've now lived in three states where one can't use a handheld phone (and I've been a good boy … most of the time … or at least occasionally). And indeed, while the number of cell subscriptions has exploded to over 250 million from a base of about zero 15 years ago, the total number of police-reported accidents has fluctuated in a pretty tight band during that time. The average number of accidents over those 15 years has been about 6.3 million, with a high of about 6.8 million in 1996 and a low of 5.8 million in 2008; the standard deviation is about 4.15% around the mean. I'd bet dollars to donuts that if you overlaid miles driven on the data, the rate of accidents per mile would be darn near constant. [Now, I'll be the first to admit that texting/emailing is a whole different story . . . anyone with a Blackberry behind the wheel is a menace to souls and property!]
And that's what makes Smeed an unwitting market philosopher. Markets are all about calibration of risk, and his insight was that as people feel safer, they get more reckless. Comfort breeds complacency. You can fiddle with speed limits, pave roads, install air bags, ticket people for manner of infractions, but folks just end up stretching their envelopes of comfort until they undo the putative progress; they calibrate to the risk. And the same is true for the markets: just think about the banks that kept stretching (in every way) and the hedge funds that kept getting pushed to add risk because their volatility was too low. Maybe now that memories of a crack-up are fresh in people's minds, they'll be a little more cautious, but that caution will be thrown to the wind as soon as we all get comfortable again.
Inevitably, we'll have some regulations and rules thrown at the markets. But what real effect will that have? Remember when the "circuit breakers" were established after Black Monday? Traders joked that trading curbs would give people a couple of hours to write out their trade tickets while the markets were "cooling off." But no matter the safeguards we put in place, regardless of who we call systemically important, it's darn-near impossible to save us from our reckless selves.
But maybe it's New Hampshire that has it right: it's the only state in the Union that doesn't have a universal seat belt law. For those of you who've never seen it, New Hampshire's roadside seat belt signs say: "BUCKLE UP UNDER 18 / COMMON SENSE FOR ALL." Does it surprise anyone that the Live Free or Die state is number 49 in the among the 50 states in traffic fatalities? Maybe we all could use a little more common sense and a little less regulation, on the road and in the markets?
Let's all be careful out there.