Plane taking off, photo courtesy of xlibber from Flickr.
What is an “asymmetric loss function” (ALF) and what does it have to do with Chile nuclear power? Economist David Henderson says that if you had no ALF, you would miss half your airline flights.
The asymmetry is that a mistake in one direction (say, too much) has a much lower cost than a mistake in the other direction (in this case, too little.) Back to flights. If the loss to you of being 30 minutes too early for a flight is the same as the loss to you of being 30 minutes too late, that is, if you had a symmetric loss function, you would be late roughly as many times as you would be early. Of course, we’re not. And the reason we’re not is that the cost of being 30 minutes too late is typically a large multiple of the cost of being 30 minutes too early.
Photo courtesy of L.T. Hunter from Flickr.
Henderson asked his readers for actual examples from their lives of asymmetric loss functions where the loss is great. One reader responded, “isn’t the classic example the college guy with a condom in his wallet?” Another replied, “having more than enough versus having too little gas in my car to get me to my next destination, with no gas station between me and the destination.”
One reader implies that the government in the USA is using very low alcohol limits while driving as a back door to partially prohibiting drinking:
“If I am pulled over and my breath tested, much better to have less alcohol in my blood than the legal limit rather than more.”
Calder Hall nuclear power station in the United Kingdom was the world's first nuclear power station to produce electricity in commercial quantities. Photo courtesy of Wikipedia.
Let’s suppose that in Japan the probability of a nuclear disaster is one in a thousand when it can occur only in the event of a huge earthquake that causes a huge tsunami that floods a nuclear power plant located at the shoreline; and that the probability of disaster is one in a trillion if the plant is located 50 miles inland. I think most of us would agree that it’s be foolish to construct the plant at the shore, but wise to construct it inland.
Isn’t that the situation that a nuclear Chile power plant would confront? Nevertheless, I don’t think a nuclear plant will be constructed in Chile because we’re fearing and seeing the Japanese disaster, but there are great unseen losses:
- the cost of power is double that of the USA, and
- other power sources pollute the air and cause cancers, and
- hardly anyone in Santiago has air conditioning in their home and many people die in summer traffic accidents going to and from the ocean, in an attempt to escape summer heat.
Is a nuclear Chile a reasonable risk?
Viña del Mar, summer escape destination for Santiago residents without air conditioning. Photo courtesy of Monica Arellano-Ongpin via Flickr.
I’ve always maintained that if a utilities company is willing to assume all the liability for a nuclear plant then I am happy to see one built. On the otherhand where the government assumes liability like in Japan you can be guaranteed safety standards will be enforced with less than optimal effort because there is no damage to the company in the event of a disaster.
I hope Chile follows your advice because investors are eager to accept the risks and rewards. The price of electricity is too high, so Santiago has few air conditioners, which are needed in January and February. There is an upcoming vote on a big hydroelectric project, but even if it is approved, it will take many years to build.