Those of us who are friendly to decentralized market processes and are skeptical of centralized intervention in the market often speak about unintended consequences of intervention. The idea of unintended consequences is important, but it also comes in a few different degrees and forms worth unpacking. For now, I want to elaborate and expand on the varieties of unintended consequences – I’ll discuss some implications of these distinctions in a future post.
I’ve often heard the terms “unintended consequences” and “unanticipated consequences” used interchangeably, but there is an important distinction between these two phrases. Not all unintended consequences are unanticipated. It’s possible to anticipate an outcome which you don’t necessarily intend or even desire, but still find the action worth carrying out. An easy example of this is known and predictable side effects of medication. When a doctor informs a patient that some drug will treat their condition but is also known to cause drowsiness as a side effect, the drowsiness is an unintended but still anticipated consequence of the medical intervention. The doctor does not intend to make the patient drowsy, but nonetheless still anticipates drowsiness will occur.
Unanticipated consequences are exactly what they sound like – a result which was neither intended nor predicted. In this framing, unanticipated consequences are a subset of unintended consequences. Not all unintended consequences are unanticipated, but all unanticipated consequences are unintended. One example of unanticipated consequences comes from a program putting bounties on cobras in India. The British government wanted to reduce the number of cobras, and so decided to pay people for every cobra they killed. Seems reasonable, right? But the policymakers didn’t anticipate how people would react. Many people simply began to breed cobras in large numbers, in order to kill them and turn in their skins for money. Eventually, the British government realized what was happening and terminated the program. This in turn led the snake breeders to release their now worthless breeding stock. As a result, the cobra population actually increased. This consequence was both unintended and unanticipated.
Even within the framework of unanticipated consequences, a further distinction deserves to be made – between predictable and unpredictable unanticipated consequences. Just because an outcome was unanticipated (and thus unintended) doesn’t necessarily imply that it was unpredictable. If you’ve ever said to yourself “I should have seen that coming” when something catches you off guard, you’re acknowledging that whatever just happened was in principle predictable, even if it was unanticipated in practice. One could argue that the outcome of the snake bounty program was unanticipated but was still predictable, if the architects of that program had thought more clearly about the incentive structure they were creating. However, it’s worth pointing out it’s much easier to retrodict an explanation for why an outcome should have been anticipated than it is to predict that outcome in advance. Hindsight bias probably makes many instances of what was unpredictable at the time seem predictable in retrospect – not in every case, but at least some of the time.
To all this, I would add one further meta level distinction – the predictability of predictability. Was the fact that an outcome was unpredictable itself something that could have been predicted? A clear example of predictable unpredictability would be a Powerball drawing – you can’t predict what any given drawing will be, but you also know the result can’t be predicted. By contrast, an outcome can be called radically unpredictable when the unpredictability of the result was not itself predictable. Black swan events, as described by Nassim Taleb, are events which are radically unpredictable. Not only can you not see them coming, but you don’t even know that you can’t see them coming.
To sum up: when we act, we do so to bring about a particular result. Some results of our actions are unintended but still anticipated. Other times, there will be results which are both unintended and unanticipated. Among this result set, some of the unanticipated results were predictable in principle, while others could not have been predicted. And among the results that were unpredictable, some of them will have been predictably unpredictable, while others would be radically unpredictable.
Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.
READER COMMENTS
Spencer
Nov 30 2022 at 2:04pm
re: ” Black swan events, as described by Nassim Taleb, are events which are radically unpredictable.”
Tripe.
I used monetarism to predict the stock market bottom in Oct 2002, the 4th qtr. 2008 crash. I predicted the bottom in March 2009. I denigrated Nassim Nicholas Taleb’s “Black Swan” theory (unforeseeable event), 6 months in advance and within one day.
I predicted both the flash crash in stocks on May 6, 2010 and the flash crash in bonds on October 15, 2015.
The Stock Market Was Rocked by a Mysterious ‘Flash Crash’ Five Years Ago. What You Need to Know. | Barron’s
“Diminishing market depth and a surge in volatility were both on display Oct. 15, when Treasuries experienced the biggest yield fluctuations in a quarter century in the absence of any concrete news. The swings were so unusual that officials from the New York Fed met the next day to try and figure out what actually happened”
Link: “Diminished Liquidity in Treasury Market” or:
https://acrossthecurve.com/?p=19499
“(Bloomberg) — Trading Treasuries keeps getting tougher and tougher.
For decades, the $12.5 trillion market for U.S. government debt was renowned for its “depth,” Wall Street’s way of talking about a market’s ability to handle large trades without big moves in prices. But lately, that resiliency has practically vanished — and that’s a big worry.”
Kap
Nov 30 2022 at 6:31pm
Well done – I hope your bank account reflects your prediction record!
But, I would not dismiss Taleb so readily.
If we boil down Taleb’s insight to ‘the stock market is unpredictable,’ then we’ve missed the point. “Not only can you not see [black swans] coming, but you don’t even know that you can’t see them coming.”
Your stock market considerations seem to fall much more in the category of predictably unpredictable (excepting of course your powers of foresight).
Indeed the idea of Black Swans is even more nuanced than Kevin describes in this post.
They are outlier events, ie. outside the realm of what our observation and statistical models of the world would lead us to anticipate. We expect market crashes from time to time, we do not expect a Sept. 11 attack which closes the markets for several days.
They also carry extreme impact. Landscape redefining, if you will, beyond your run of the mill market volatility. We are commenting on a blog post following the rise of the internet.
But of course it can be easy to overlook and dismiss these things because of that third aspect of Black Swans. In short, hindsight is 20/20.
David Seltzer
Dec 1 2022 at 4:56pm
“Not only can you not see [black swans] coming, but you don’t even know that you can’t see them coming.” Right! Dornbusch’s Law tells us so. I managed risk and was managing partner in a hedge fund. I knew variance at times was undefined and never knew when the fund would experience a Cauchy event but that it would. In my capacity as risk manager, I always bought puts (insurance) against bullish positions, was never short more than we were long so risk was defined. The payoff came in October 19th 1987. The Black Swan appeared that day and our fund did very well. Volatility (VIX) was 150 intra-day and our puts increased dramatically. Some of our traders bought homes soon after. I’ve never been in the prediction business in the financial markets, but I’m reasonably good at managing risk. I accept that I can’t see it coming, but that it will.
David Seltzer
Dec 1 2022 at 4:37pm
Spencer, how many predictions did you make that didn’t materialize?
Kevin Corcoran
Dec 1 2022 at 5:17pm
I’m sorry, but I don’t see what your point is? It looks to me like your comment just boils down to “Here’s some times I successfully predicted some things, therefore black swan events don’t exist.” If there’s a more charitable reading of your comment, I don’t see what it is. Am I missing something?
Thomas Lee Hutcheson
Nov 30 2022 at 4:26pm
Good points. People often argue against policies as if any negative consequences are unanticipated (and presumably not taken into account by those who favor the policy) rather than just that the policy does not pass a CBA.
Grand Rapids Mike
Nov 30 2022 at 5:09pm
One of the major problem of unintended consequences is fixing the problem after the consequence is known. Stopping the breeding of cobras is a piece of cake compared to stopping a bad program that now has a vested public supporting it. No matter the analysis showing that a federally funded program was a mistake, when it creates a some level of public support there is in most cases limited political will to stop it. So bad program just keep on going like the Energyzer Bunny.
Thomas L. Knapp
Dec 1 2022 at 5:25am
“Unanticipated consequences are exactly what they sound like – a result which was neither intended nor predicted.”
No, an unanticipated consequence is just one that isn’t predicted. Intention has nothing to do with it. It is entirely possible to intend, but not anticipate, a consequence. In your medical analogy, the doctor trying a treatment as a last resort even though he does not expect to work.
steve
Dec 1 2022 at 1:22pm
Arent there consequences, intended or unintended, to inaction? We chose to ignore air pollution for a long time until we had people dying during inversions in places like LA. Or more recently we have pretty much left medical compounders unregulated, until they started sending out products that killed or paralyzed people.
At some level this all seems pretty banal though I guess in libertarian circles it is very important. There are almost always trade offs for everything you do, or for things you dont do. If you have ever run a business or been in charge of people then you should know that not having policies generates consequences, often unintended, just like having policies. So more broadly we shouldn’t try to regulate everything and we shouldn’t have total laissez faire.
Steve
Kevin Corcoran
Dec 1 2022 at 4:46pm
Yes, of course, but there is an important asymmetry in the justification needed for actively and forcibly intervening, particularly when you can’t fully know what the results of the action will be. As is often the case, Michael Huemer put it well in his paper In Praise of Passivity:
steve
Dec 5 2022 at 5:13pm
Kind of a straw man. You dont generally generate policy, regulations, in the case of government, unless you have already seen harms from inaction or it is predictable.
I wish everyone had the opportunity to run a business for a while or even just serve as an officer in the military. This stuff become pretty obvious.
Steve
David Seltzer
Dec 1 2022 at 4:34pm
“It’s possible to anticipate an outcome which you don’t necessarily intend or even desire, but still find the action worth carrying out.” In college and in the military I saw people drink to the point of passing out. They knew they would feel terrible the next day, but they made that trade-off because they were having fun.
Kevin Corcoran
Dec 1 2022 at 5:18pm
I may have once been such a person! More during my military days than my college days, though.
Grand Rapids Mike
Dec 3 2022 at 9:33am
In college I learned Boones Farm wine, while cheap, was not worth the after effect. So I learned and used other sources of adult beverages. So in this case, the consequence resulted in a change. Unfortunately in many government programs the unintended consequence does not result in a change. It is as Yogi Berra said “it’s Deja Vou all over again”. So when when individuals make a bad choice resulting in an unintended consequence, the likely hood of a change in some, not all, cases can be made since the motivating factor is personal. When one has a direct skin in the game, change is more likely to happen. In Governmental funding cases, the motivator to change from a unintended consequence does not exist i.e there is no real skin in the game to motivate a real change.
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