Is That Safety Net As Safe As You Think?

Is That Safety Net As Safe As You Think?

Image by Free Photos on Pixabay

Pictures taken from just below the summit of Everest, showing hundreds of climbers queueing to ascend to the summit, went viral on social media recently, highlighting the record number of deaths recorded so far in the 2019 climbing season.

This video from the Daily Telegraph shows just how bad things have become

The problem stems from the fact that the Nepal Tourist Board in recent years has decided to increase the number of climbing permits available for Everest by a significant amount. I can understand why a developing country such as Nepal would welcome the income the permits bring into the country, along with the related economic benefits from having so many people visiting their country.

Elite achievement to selfie opportunity

You no longer need to be an elite climber to attempt Everest – now you just need to be rich enough to afford to buy a permit and be babysat by a Sherpa willing to risk his life for what is, to him, a considerable amount of money.

Josh Brown wrote a piece last week highlighting how, thanks to technology, this kind of thing will continue to happen. Successfully reaching the summit of Everest used to be regarded as a feat of almost super-human proportions – only a handful of the very best climbers in the world made it to the summit, and many world-class climbers failed to do so.

The mountain didn’t get any smaller, or less treacherous. So what happened? As Josh explains:

“What happened was a slow but steady amount of progress in the technology and equipment needed to make the climb, thus opening the way for more and more people to attempt it. Lots of money thrown at a problem – getting to the top – that seventy years ago was only being dared by a handful of would-be summiteers. And when lots of money is thrown at a problem, and the technology becomes widely available to the masses, the opportunity is gone.”

 The result, as Josh so eloquently puts it:

“And before you know it, what was once a lush and bountiful opportunity for the few, becomes an endless chain of mouth-breathing nobodies pushing each other off the side of a mountain for their own fleeting moment of opportunity in the sun.” 

And a record number of deaths on the mountain.


A similar situation has arisen in the world of big wave surfing, as Allison Schrager explains in her entertaining book ‘An Economist Walks into a Brothel’.

For many years, big wave surfing – a high-risk sport – was the domain of only the most experienced surfers.  Surfing waves up to 80 feet high is not for the faint-hearted, nor for the risk-averse. But most big wave surfers are not the thrill seekers we might imagine. They understand the risks of what they are doing, they research the data on weather conditions and use that data to determine where the best – and safest – surfing locations are at any given point in time.  In other words, they will do anything they can to manage and minimise those risks. They are not foolhardy. They even hold regular Safety Summits to share best practice.

One of the most significant risks in the sport is of being pulled under by a wave and not being able to reach the surface before running out of oxygen. The introduction of jet skis into the sport means that rescuers can now reach surfers who get into trouble, either from being dragged underwater or by being swept out to sea, much quicker than someone can swim out to help them.

Thanks to jet skis, big wave surfers can also now ride bigger waves, because they can get to them, something they couldn’t do when having to paddle to them on their surfboards. Technology has enabled surfers to do things they could only dream of in the past.

But, just because we can do something, doesn’t mean that we should.

As Schrager points out:

“A safety net can either catch you when you fall or be used as a slingshot to propel you to new heights. Not only that, the fact that the safety net is there may embolden you to take bigger risks.” 

As with climbing Everest, the risks for big wave surfers haven’t gone away – the sea is just as treacherous as it always was. But if you have the money, you can hire a team on jet skis to babysit you while you surf the big waves. As a veteran big wave surfer stated in his interview with Schrager:

“It gets abused. Maybe people should be out there in ten-foot water, not twenty. They are counting on jet skis to save them and are out there for the wrong reasons – to get noticed, for practice. They count on skis and lifeguards to rescue them. One guy [in large surf] says to me, ‘Keep an eye on me, I am not that good.’”

The Peltzman Effect

The US introduced the compulsory wearing of seat belts in the late 1960s. Sam Peltzman published a research paper in 1975 which showed that following the introduction of this law the number of deaths from people in the cars being thrown through windscreens plummeted, but the numbers of pedestrians killed in car accidents increased. In other words, drivers drove more recklessly because they felt safer. Taking bigger risks because technology makes us feel safer, became known as the Peltzman Effect.

We can also be affected by this as investors.  A high profile example would be the ill-fated Long Term Capital Management (LTCM) whose Icarus-like investing strategy led to one of the biggest financial blow-ups in market history.

They believed their algorithms made investing so safe that they were prepared to leverage their investments to massive levels.  That strategy appeared to be validated by the astonishing returns the fund achieved in its early years. However, what LTCM failed to take account of was the effect of a random event.  In their case, that random event was Russia defaulting on its debt (something LTCM thought virtually impossible).

In the summer of 1998, the fund held $3.6 billion in capital (and had borrowed a further $125 billion to invest), two-fifths of which was owned by the partners of LTCM.  They had calculated, and believed with absolute certainty, that the fund was unlikely to lose more than $35 million on any single day.

On one single day that August the fund lost $553 million—15 per cent of its capital.

Just five weeks later, they had lost every cent.

The Peltzman effect can cause us to deviate from a sensible, diversified investment strategy to chase returns. It’s hard to watch others make money from the sidelines, and the temptation to follow the herd can be mighty persuasive. You can end up kidding yourself that nothing can go wrong, that the safety net is that everyone wants in and therefore you can afford to take more risk than you would typically do. If you’ve never experienced a bear market, you can be lulled into a false sense of security.

When we think we have a safety net, we are inclined to take more risks, when what we should be doing is asking ourselves whether the safety net really does remove the risk. An excellent method of testing this out when considering an investment you believe to be a ‘sure-fire winner’ is to step back for a minute and ask yourself the question ‘And then what?’ It will force you to think about the risk you might be taking and think about not just the standard economic ups and downs that affect markets but also the unplanned, random, black swan event that might derail things.

I’ll leave you with some wise words from Schrager:

“Risk models can’t account for everything that can possibly happen, and they are not meant to… There is no way to make an 80-foot wave safe and there is no way to make a 25-to-1 leverage ratio risk free.”