The Best of Intentions

“And then what happens?”

Photo: Kamainv. Source: Wikimedia

That’s my favorite economic question to ask when I’m looking at a new proposal. Everyone with a business plan will outline their actions and the intended consequences of their enterprise. Uber has a plan to facilitate “ride sharing,” where folks with some extra time and access to a car can earn a few dollars by “sharing” a ride with someone they connect with on their cell phones.

But there are always unintended consequences, too. One of the side-effects has been full cell phone lots at big city airports – those formerly small, quiet spaces where you could wait for a friend to retriever her luggage. Now – unless they get shooed away – the cell phone lots are full of Uber drivers waiting for travelers to arrive and call for a ride.

British colonial authorities had experience with this kind of second-order effect. When the British Raj in India became concerned about the prevalence of venomous snakes, they offered to pay residents for turning in dead cobras. Industrious Indians recognized a new source of revenue, and began breeding cobras to supplement their income. When the rulers understood what was happening, they scrapped the program, and the cobra breeders set the now-worthless snakes free. A well-intentioned program that backfires and makes the problem worse is called a “Cobra Effect.”

Unintended consequences can be positive, as when clear-cutting a hardwood forest diversifies the landscape and generates additional habitat for various animals, or when an architectural and planning error in a bell-tower in Pisa, Italy created a tourist attraction. It’s impossible to anticipate every new development. But trying to understand second-order and third-order consequences is critical.

Photo: Saffron Blaze. Source: Wikimedia

Because if we don’t think about these effects, the market will.

Douglas R. Tengdin, CFA

By | 2018-03-06T07:43:42+00:00 March 6th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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