Tag: disaster

A Modest Proposal: Sandy, Tontines, And Disaster Markets

by on Oct.29, 2012, under general

It is a melancholy object to those in our society when they see the streets flooded, with townspeople refusing to evacuate ahead of a terrible hurricane and thus recklessly risking death.

I think it is agreed by all parties that such prodigious suffering is unnecessary and avoidable, and that whoever could find out a fair, cheap and easy method of saving these people would benefit all. I shall now therefore humbly propose my own thoughts, which I hope will not be liable to the least objection.

It is understood broadly that we live in an age of wise crowds; that we humbly recognize all of us are smarter than any of us. The rise of prediction markets, most especially the proposed Policy Analysis Market for political developments in the Middle East, suggests a course of action oriented around these precepts.

The inefficiencies of centralized planning taint the top-down evacuation orders emanating from government bureaucracies; it should come as no surprise that citizens quite rationally disobey them. Where government fails – that is to say, inevitably and always – we should replace them with markets. So long as we get the incentives right, as social entrepreneurs like to say, we can harness the engine of self-interest for both the individual and collective good: capitalism with a human face.

So how might we make a market in disaster preparedness?

The core, I think we can all agree, would be a tontine. We could distribute credits equally among citizens, redeemable for cash should they survive a given weather event. Such a reward would incentivize wise behavior more than any notice from a centralized weather service.

Of course, the value of the credits should increase as the number of survivors decrease. It is no great feat to merely follow the herd. Instead, those who made better decisions on equivalent information should be rewarded for their efficient use of information. The (remaining) market will then quickly move to incorporate this information and improve everyone’s outcomes in the future.

Some might object that such a system incentivizes living in dangerous areas. But physical safety need not be an impediment to wealth. As a matter of social justice, distant observers should still be able to benefit from others who wade weeping through waste-deep filth as everything they’ve known and loved burns down behind them. Thankfully, advances in the financial engineering have created sophisticated instruments through which such broadly distributed benefits may be achieved.

For example, it would be trivially simple to create derivative products of these tontine contracts. Even those far removed from the affected areas will be able to wager on lives of the victims, who could be organized into different risk tranches depending on, say, their location relative to known floodplains. Investors could rationally incorporate all of this information into their plans and benefit from their wise decisions.

The wonder of markets is that they serve all of society. A Disaster Market would not only potentially enrich some of its victims and speculators, but would also provide practical price signals for those merchants hoping to enter the market. Disaster Markets, in aggregating all known information about risks, would predictively inform emergency response teams where their services were most highly valued. These teams, following the admirable example of Crassus in antiquity, would themselves be private organizations, arriving quickly to the scene and then competing among themselves for the services of the survivors, who themselves would aggressively bargain over the rescue of ruins which were their lives.

Hurricane Sandy has revealed the inadequacies of our current social systems. As a social entrepreneur, I aim only to harness the power of markets to avoid such a perpetual scene of misfortunes. I profess, in the sincerity of my heart, that I have not the least personal interest in endeavoring to promote this necessary work, having no other motive than the public good of my country. For I live on high, dry ground, in a well-built house, and am thus stand to gain little compared to those fortunate few with the opportunity to profit from their pain.

This entry was originally posted on the blog of the Center for Civic Media.

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