[thechat] Hiding from Elections Now

Matt Warden mwarden at gmail.com
Mon Oct 27 17:49:16 CDT 2008


On Mon, Oct 27, 2008 at 4:50 PM, Martin Burns <martin at easyweb.co.uk> wrote:
>>> Before the CRA, it was legal for banks to not consider issuing
>>> loans to
>>> people who lived in certain geographic areas. Banks would have maps
>>> (literally) with "no loans here" areas marked off on them. If
>>> someone same
>>> in asking for a loan with a "wrong" address, tough luck.
>>>
>>> The CRA stopped this practice of arbitrary discrimination.
>>
>> Ok, we're getting somewhere. Why did the banks have these maps? Do you
>> disagree that it's related to risk?
>
> I think it's a fundamentally lazy approach to risk, shot through with
> degrees of prejudice, that meant that people in those areas were much
> less likely to get loans from reputable lenders (as opposed to sharks)
> than their individual status would otherwise suggest.

Absolutely. Zero argument from me.

> Now the free marketeer will argue that that leaves money on the table,
> so would never happen. But neither you, nor Adam Smith, are allowing
> for the irrationality involved in prejudice.

That is not what the free marketeer would say. The whole point is that
it is not worth the cost for the lenders to seek out the smaller
fraction of that area that would qualify for their loans.

Prejudice is not always irrational. If 99% of a certain geographical
area defaults on their loans, it is not illogical to avoid that area.
If car drivers under 25 are more likely to be in accidents, it is not
illogical to charge them higher premiums. If you can not observe or
explain the full complexities of a correlation, that does not mean the
correlation doesn't exist. Is it "fair" that <25 year-olds are charged
higher premiums even if they themselves present no elevated risk? No.
But insurers have decided it is not worth the cost required to
investigate on an individual basis the exact level of risk.

Heuristics are used all the time to measure risk. When government
attempts to counter-act the heuristics, they end up ignoring that the
heuristic had any basis in reality in the first place, and that leads
to individuals accepting greater risk. This is what happened with the
CRA and the government's obsession with promoting American home
ownership.


-- 
Matt Warden
Cincinnati, OH, USA
http://mattwarden.com


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