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Author: chris dillow   |   Latest post: Sat, 4 Jul 2020, 1:33 PM

 

Tail risk in policing

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One of the key things you learn in finance - often the hard way - is that averages and majorities are not sufficient statistics. What also matters - and matters a lot - is the distribution and in particular the extreme of the distribution. Making a profit in 99 days out of 100 is little use if the hundredth day wipes you out.

This tail risk comes in many forms: bonds can default; liquid assets can suddenly become illiquid; uncorrelated assets can fall together; and the rare event such as a crash that you've sold insurance against can materialize. And we've known since October 19 1987 that the risk is higher than a normal distribution predicts.

Intelligent risk managers and retail investor should know all this and guard against it - although many do not. Buffpol

Which is why I was disappointed in this dispute between Tom Chivers and others. Tom is absolutely right that we over-estimate the prevalence of things that are salient: there's a phrase for this - the availability heuristic. But I'm not sure he's relevant. Risk is probability multiplied by impact. Even if there are very few murderous policemen, the damage they do is huge - not just the deaths they case, but the loss of trust in the police and the millions of pounds of damage done by the riots they provoke. One bad copper can do more harm than dozens of good ones do good. There's tail risk in policing as in finance.

In this sense, Chris Rock is dead
right. Policemen are like airline pilots: being relaxed about about a few "bad apples" is horribly complacent. It's committing a basic error - the neglect of tail risk.

Here, Mr Rock's analogy with pilots is illuminating. The thing is that - as Matthew Syed points out - the airline industry goes to great lengths to minimize tail risk:

When there is a crash, [black] boxes are recovered and analysed so that enlightened changes can be enacted. This means that the same mistake never happens again. It is this constant willingness to learn from failure that means aviation has become one of the world's safest forms of transportation.

Why doesn't a similar thing happen in policing? Why do we shrug off acts of brutality as the acts of bad apples?

It isn't just because the costs of such brutality are smaller and - being borne by blacks and working class people - more tolerable.

Another reason, I suspect, is the tendency to see more variation on our side than on the other: "we are all different; they are all the same." If you're on the side of the police a bad copper is atypical and tolerable: as Dar Williams
sang, "when our people torture you that's a few random cases." If you're not on the side of the police, on the other hand, then ACAB. Both errors are the flipside of each other: the ingroup heterogeneity bias is the counterpart of outgroup homogeneity.

There's more. David Correia and Tyler Wall say:

Encroachment on private property is a threat to capitalist order, and it is police who manage this threat...The elite fear the destruction of their property, yes, but even more they fear the destruction of the social relations that make private property possible. And so they fear a world without police.

They are also loath to rock the boat by rooting out bad coppers: you don't bite the hand that feeds you.The role of the police is not merely to uphold the law, but to uphold law and order. This earns them the gratitude of the ruling class, and hence its tolerance.

We see a counterpart to this in finance. Experiments by Elise Payzan-LeNestour and James Doran have shown that people become addicted to small gains even when these are accompanied by large downside risk. As Charles Prince, then-CEO of Citi, famously said in 2007: "as long as the music is playing, you've got to get up and dance". Whilst a strategy works for you, you overlook its downside.

You might find it odd that I'm drawing analogies between finance and attitudes to policing. You shouldn't. There's a common theme here - cognitive biases.These have given us the field of behavioural finance, but also a deeper understanding of how capitalism reproduces itself by generating ideas that sustain the existing order. The link between my day job and my Marxism is tighter than some of you like to think.

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