Deepwater Horizon Incident, human factors, and economic damages.

David Leonhardt, in a column in today's New York Times Magazine, discusses BP's managers' "seeming indifference to safety and environmental issues," especially the proverbial "black swan" event.

Much of this indifference stemmed from an obsession with profits, come what may. But there also appears to have been another factor, one more universally human, at work. The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely — and may even have been unlikely — but that would bring enormous costs.

Leonhardt points out that in the case of the Deepwater Horizon incident, governmental policy "...actually encouraged BP to underestimate the odds of a catastrophe...."

In a little-noticed provision in a 1990 law passed after the Exxon Valdez spill, Congress capped a spiller’s liability over and above cleanup costs at $75 million for a rig spill. Even if the economic damages — to tourism, fishing and the like — stretch into the billions, the responsible party is on the hook for only $75 million. (In this instance, BP has agreed to waive the cap for claims it deems legitimate.) Michael Greenstone, an M.I.T. economist who runs the Hamilton Project in Washington, says the law fundamentally distorts a company’s decision making. Without the cap, executives would have to weigh the possible revenue from a well against the cost of drilling there and the risk of damage. With the cap, they can largely ignore the potential damage beyond cleanup costs. So they end up drilling wells even in places where the damage can be horrific, like close to a shoreline.

Human factors resulted in management underestimating the chance of the incident. Federal law lead them to the underestimating of its costs.