Risk Aversion: A Statistical Primer for Public Servants

This is a rare post for me as it is the prequel to a series that I suspect will grow more macabre in each installment.  My grandfather, William H. Parsons Jr. advised me to, “never attribute to malevolence what is ignorance.”  This aphorism – variously ascribed as the work of Goethe, Jane West and many others – was likely known to my grandfather as his contraction of the Albert Camus observation in his 1947 work The Plague in which he states:

“The evil that is in the world always comes of ignorance, and good intentions may do as much harm as malevolence, if they lack understanding. On the whole, men are more good than bad; that, however, isn’t the real point. But they are more or less ignorant, and it is this that we call vice or virtue; the most incorrigible vice being that of an ignorance that fancies it knows everything and therefore claims for itself the right to kill. The soul of the murderer is blind; and there can be no true goodness nor true love without the utmost clear-sightedness.”

Therefore, in the interest of addressing the vice of ignorance, I offer the following.

It is nearly daily that I hear public servants and bureaucrats admonish me that, “Australians are risk-averse.”  This, along with other dismissive excuses for inaction and breach of public duty, has become a fascination of mine leading me to wonder if statisticians in Australia forgot to teach classes on two-tailed distributions of hypothecated metrics.  “Risk” is a deviation from an expected return or outcome.  And deviation happens both in the positive and negative sense.  After living in this country for nearly 9 months, I can confidently state that I’ve seldom, if ever, found a population more risk tolerant (and blind) than Australia’s public sector.  The risk that the public sector takes with the profligacy of a drunken sailor is the near certainty that the public in Australia will be incapable of holding them accountable for avoidable ill-advised actions. 

Clearly, Australian investors will never find out that their pensions and superannuation funds have returned less than passive market exposure would have delivered.  And not just a little less.  Median performance for superannuation in 2016 was about 7.7%.  During the same period, internationally managed passive investment products returned over twice that amount.  But Australians would not want the additional $33.8 billion they could have received last year and the Australian Treasury wouldn’t have wanted the taxes on those earnings. 

Clearly, Australian tax payers will not ever concern themselves with the over $30 billion spent annually on procurements ranging from submarines to combat vehicles to ships and planes.  At no point will the public learn of the propulsion and battery systems in submarines that could expose Australia’s navy to detection with known counter-measured technology included in the current plans.  That is no point until a submarine filled with Australians is sunk in the South China sea at which point we will officially mourn the loss of life that was potentially avoidable today.  At no point will the public know that local businesses supporting the land and sea vehicles will last only as long as the procurement after which known patent estates held by European defence companies selling to Australia will block or control Australia’s export market.

Oh, and before I go any further, two advertising and media relations agencies have advised me that the Australian public and media are unable to see the “relevance” of information like this. 

But, I digress.

Risk is deviation from an expected or modeled outcome.  In a country that tells itself dogmatically that it has had 26 years of uninterrupted economic growth – purportedly holding the record for the longest recession-free growth for developed economies – it’s nearly impossible to discuss risk.  That’s because, like the definition of “risk”, Australia also has a univariate view of the term “economy”. 

Let’s get something abundantly clear.  Australia is the world’s 22^nd largest exporter.  And over 60% of the exports from Australia have little to no value add.  In other words, the $191 billion in exports are largely Iron Ore, Coal, Petroleum and Gas, Copper Ore, Gold, Aluminum, Nickel, and Zinc.  The price for these – that’s right – the thing that fuels the “economy” are not set by or in Australia.  By luck of the geology on land (who’s elders past and present, we give lip-service to respecting), the economic record is based on the rest of the world’s demand for the periodic table we live on – not the industries we build or the products that we design and export.  And over the past 50 years, Australia’s Economic Complexity Rating has fallen from 22 to 53. 

Unfortunately, what this means is that Australia is allowing inertia – not innovation – to animate its economy more than many other countries.  And this is VERY RISKY!  Somewhere between 30-40% of Australia’s investment capital is off-shore in funds that are underperforming reasonable benchmarks.  This is VERY RISKY.  Australia’s reliance on imports of technology and usable products – in excess of its exports – means that we’re dependent on a world more than being depended upon.  Oh, and in the recent comedy of education budget conversations, Vice Chancellors are quite ready to admit that the “education sector” is being underwritten by foreign students  With about 1/3 of the student population from overseas paying as much as 400% the Australian tuition rate, one can readily see that Australia’s leading institutions of higher learning are reliant on the influx of students from overseas – not on the productivity of innovation and scholarship from their institutions – to keep them afloat.  Risk averse?  Hardly! 

Allow me to make the following uncomfortable observation.  Stewardship and public accountability are in short supply across the globe.  That’s not unique to Australia.  But the reflexive defense of a status quo alleging risk aversion puts Australia on a collision course with the likes of Japan – an economy that hasn’t recovered from the 1998 financial crisis.  Because, like Japan, unconsidered complacency fueled by exogenous factors that are not explicitly acknowledged leaves Australia vulnerable to significant and possibly permanent negative growth risk.  Ireland’s tax haven economy (now busted by the EU and U.S. tax appetites) lasted 78 quarters.  It’s GONE.   Poland’s “cheap” labor market worked until accession was in full bloom and those 77 quarters aren’t coming back soon. 

But not to worry…recent studies published by Drs. Michael C. Clarke, Duncan Seddon and Mr. Greg Ambrose in the Ausimm Bulletin (December 2014) have suggested that Australia’s next “mineral boom” may be to dislodge the waning U.S. monopoly on Helium.  And pumping that out of the ground and into the illusion may keep the music playing while the public continues to lose. 

[Image from AnaesthesiaUK http://www.frca.co.uk/article.aspx?articleid=100375]