Problem with Hammurabi - 2

If someone tells you that everything has a price, it sounds very commercial, a bit cynical and perhaps, even evil. But that isn’t always the case.

Mohnish Pabrai says that the US regulatory body for aviation puts the “worth” of a human life at $3 million. (This number is revised periodically, to adjust for inflation). But what does that mean?

“What that means is that if there is a plane crash and 100 people die, the first thing they know is that the human cost of the incident is $300 million.”

Set aside your morality; and pay attention to what this approach translates into.

So what is the impact of the $3 million price tag? Pabrai explains:

“What aviation companies will do is look at the number of people that will die in some kind of reasonable period of time; they’ll do some models, and they’ll figure out what amount they have to spend. If they believe that 100 people are going to die if they don’t do anything, that’s $300 million. So they’ll ask themselves, “Can we fix this issue for $300 million?” And if the answer is no, they will not do it. It’s a very pragmatic approach, and it works very well.”

Outraged? Safety should be beyond a price tag, you fume?

Then consider what happened after the equivalent of Chernobyl in the US, where the American nuclear industry refused to assign a price tag to a human life:

“The nuclear industry in the U.S. said, “We will never have an accident, no matter what. It’s just not acceptable.” The end result is that the U.S. has the highest cost of building nuclear power plants in the world. We haven’t built one in 20 or 30 years.”

That’s the cost of taking the “We can never lose a single life, period” approach: less nuclear energy, more fossil fuel based energy, more pollution…

That is why Pabrai says:

“The moment you mandate that something have a zero error rate, you will take the cost off the charts.”

Thus, if the aviation standard was that a plane should never crash due to a bird hit ever, then “a round trip from L.A. to New York is going to cost one million dollars”. Instead of the current $300 price that people actually pay.

In real life, pragmatism is not always a compromise. Usually, it’s a necessary thing and often produces better outcomes than what feels like the right thing. Because regulations are meant for the real world, an infinitely complex domain where it is impossible to predict what even the best meant law may lead to, aka the butterfly effect.