Risk Compensation

In 1975, University of Chicago economist Sam Peltzman published a study that infuriated the safety establishment. He looked at the effect of mandatory seatbelt laws on traffic fatalities and found something no one wanted to hear: the laws didn't reduce total traffic deaths. Drivers who buckled up drove more aggressively — faster, closer to the car ahead, more willing to take risks in bad weather. The seatbelts saved the drivers. The driving behaviour killed more pedestrians and cyclists. The net effect on total fatalities was roughly zero. Safety equipment changed behaviour in a direction that consumed the safety margin it created.

This is risk compensation: when a safety measure is introduced, people adjust their behaviour to offset the protection — taking risks they would not have taken without the safety net. The mechanism is not stupidity. It is rational recalibration. If a new safety device reduces the cost of a crash from catastrophic to manageable, the expected cost of risky behaviour drops. People respond to that new expected cost by tolerating more risk. The safety device doesn't fail. It succeeds — and the behavioural response to that success erodes the net benefit.

The pattern repeats across every domain where safety measures exist. Antilock braking systems were supposed to reduce accidents. Studies by the Munich Institute for Traffic Research found that drivers with ABS brakes drove faster, followed more closely, and braked later. The technology worked flawlessly. The humans adapted to the technology by pushing harder. Skydivers equipped with automatic activation devices — which deploy the reserve parachute if the jumper hasn't deployed by a safe altitude — take riskier jumps, pull later, and attempt more aggressive manoeuvres. The AAD is a genuine lifesaver. It is also a genuine risk amplifier. Football helmets were introduced to prevent skull fractures. They succeeded. They also enabled head-first tackling techniques that produced an epidemic of chronic traumatic encephalopathy that bare-headed players would never have risked.

The business applications are the ones that matter most for builders. Abundant venture capital funding is a safety net. A founder with $50M in the bank and 36 months of runway makes different decisions than a bootstrapped founder with six months of cash. The cushion doesn't just provide time. It changes risk appetite. The well-funded founder pursues moonshot product bets, hires ahead of revenue, enters markets without unit economics — behaviours that a cash-constrained founder cannot afford. Sometimes this works brilliantly. Often it produces the startup equivalent of driving faster because you're wearing a seatbelt. Government bailout expectations produce the same dynamic at institutional scale. When banks believe they will be rescued from catastrophic losses, they take risks that create catastrophic losses. The safety net doesn't prevent the crisis. It funds the behaviour that causes the crisis.

The core insight is uncomfortable: safety nets change incentives, and changed incentives change behaviour, and changed behaviour can neutralise or reverse the safety the net was supposed to provide. Every safety measure has a first-order effect (reduced harm) and a second-order effect (increased risk-taking). The net outcome depends on which effect dominates — and it is almost never measured.