The Value of the Road Not Taken

In 1916 Robert Frost published his poem The Road Not Taken. It is a narrative poem, where the narrator describes a moment when he comes to a fork in the road while taking a walk through a forest. After mulling it over, the narrator decides to take the road that seems to be less travelled.

The poem is by many regarded as one of the most misunderstood poems in history. It is often quoted when expressing views of individualism and not conforming to general convention.


At the end of the poem, the narrator sighs as he tells the reader that he took the road less taken and that it made all the difference. But the sigh is left open to interpretation by Frost, as the reader does not know if the sigh is from relief or regret.

The Misinterpreted Message

You have to be careful of that one; it’s a tricky poem — very tricky,” Frost is known to have said about the poem. The story has it that he wrote it to tease a friend of his, Edward Thomas, who often had problems with coming to a decision over choices that were offered to him. Frost describes him as a person who, “whichever road he went, would be sorry he didn’t go the other”.

An economist would tell you that the problem that Edward Thomas – just as the narrator in the poem – was battling with was the Opportunity Cost of the choices that he had.

Opportunity Cost

The Opportunity Cost of a decision basically equals the benefit of the best alternative option that you have to choose from. This means also means that the opportunity cost is dependent on the situation that you find yourself in at any given time. Furthermore, it means that your opportunity cost is not the same as my opportunity cost.

The concept of opportunity cost is well known in economics and finance, where it is relatively easier to measure the potential outcomes. The Opportunity Cost of Capital, for example, is the rate of return that could have been earned by putting the same money into a different investment with equal risk.

Mistakes of Omission

In The Road Less Taken, the narrator has two choices. Therefore, his opportunity cost is whichever road that he will not take. If he picks the wrong road, he will have made a Mistake of Omission. When asked about their biggest mistakes at the Berkshire Hathaway 2011 annual meeting, the legendary investors Warren Buffett and Charles Munger highlighted specifically about their Mistakes of Omission.

The Road Less Taken

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;

Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,

And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.

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Solving the Tragedy of the Commons

Common resources are resources which are both non-excludable and rival. Unlike public goods, common resources get depleted as more people use them. An example of a common resource is the Tuna in the ocean.

Tunas are non-excludable since there is no property right to fish in the ocean and no one can legally be prevented or fish for Tuna. The fish are also rival which means everybody fish for Tuna in the ocean which will then leads to the tragedy of the commons which is the depletion of the Tuna stock in the ocean.

Common Pool Resources

The definition of the tragedy of the commons is that the tendency of any resource that is unowned and non-excludable which leads the resource to be overused and under maintained. A case study of the tragedy of the common is the Tuna catch which is rapidly depleting by 75% since 1960.

Although nobody wants this to happen this happened because the fisherman has no incentives to conserve and maintain common goods because he/she doesn’t own the stock of resource.  There are three approaches to solving the tragedy of the common:

  1. command and control,
  2. cultural norms,
  3. property rights

1. Command and Control

Command and control can be defined as rules and regulations which can be set to limit or avoid this tragedy but this method work for sometimes and it becomes inefficient and ineffective in the long run. For example, when fishing stocks start to collapse, some rules were made so as to improve the stock like a number of boats that can fish or the number of days to fish in a year. This then becomes ineffective as the fisherman starts to build advanced boats and fishing equipment which makes the regulation more and more complex over time.

2. Cultural Norms

The second approach is the cultural norms and this can evolve where people that overfish are socially disapproved while those that contribute the growth of the resource are honoured and this can help to develop procedures for managing natural resources but it can work on groups that are small and stable and it takes time to develop.

3. Property Rights

Another way to tackle the tragedy of common resources is by making the common resource excludable by creating property rights on them. This will make common resource behave more like a private group. For example, in New Zealand, an innovative solution was pioneered for the tragedy of the commons.

A tradable allowance in fish is created which means property right was created. New Zealand implement what is called Individual Transferable Quotas (ITQs) and this gives a property right to a certain tonnage of fish and the sum of the ITQ is the total allowable catch per year. This ITQs can be bought and sold by the fisherman and the best part is that there are no restrictions on boats or equipment.

This system is quite effective in New Zealand as it helps to increase the total catch dramatically since it was implemented in New Zealand and this is possible because a fisherman owns a right to a certain amount of fish year by year and he will try to preserve the values of his property over the long run which means that he will not overfish and he will also ensure that another fisherman obeys the ITQs. This means that under the right system the tragedy of the common can be reduced.

William Forster Lloyd

In 1833, a British mathematician and economist by the name William Forster Lloyd published two lectures titled On the Checks to Population. In one of those lectures, Lloyd describes the phenomenon of the Tragedy of the Commons, with an analogy of a cattle herders that shared a common parcel of land, that they used for gracing.

As Lloyd describes, each individual herder is incentivised to add cattle to his herd as the herder will reap advantages for each additional cattle but the damage to the parcel of land will be shared by all herders. As all herders try to maximize their own benefit of the parcel, this eventually leads the parcel to be overgrazed and potentially destroyed.

Garrett Hardin

In 1968, the ecologist Garrett Hardin coined the phrase Tragedy of the Commons, when an article by the same name was published in the academic journal ScienceThe article derived its title from Lloyd’s lecture and further outlined the problem described by Lloyd of people being trapped in a tragedy of common resources being depleted, by actors rationally acting on their own incentives.

Prior to Hardin’s publication, terms such as the Commons, Common Pool Resources, or Common Property were very rare in the academic literature. Hardin’s article, however, was focused on the perils of population growth and did not focus directly on proposing a solution for the Tragedy of the Commons problem.

In fact, Hardin concludes his article by saying: “The only way we can preserve and nurture other and more precious freedoms is by relinquishing the freedom to breed, and that very soon. “Freedom is the recognition of necessity”–and it is the role of education to reveal to all the necessity of abandoning the freedom to breed. Only so, can we put an end to this aspect of the tragedy of the commons.

Elinor Ostrom

It was Elinor Ostrom who pawed the ground for providing solutions to the Tragedy of the Commons. Ostrom was a political economist and a brilliant mind, who dedicated her life to the study of common goods and different systems used to manage common pool resources.

Both Lloyd and Hardin had asked the reader to “imagine a pasture open to anyone.” There was no empirical evidence or data to support the claim. It was a strictly theoretical exercise. The presumption that prevailed was that humans were helpless, trapped within this tragedy.

Elinor Ostrom, along with other scientists, disproved this idea by conducting a wide range of studies on how people in small, local communities manage shared natural resources, such as pastures, fishing waters, and forests.

In the Mid-Eighties, Ostrom and her colleagues started to review the empirical research written about common-pool resources. They discovered that much research had been done on the topic but that it was divided by disciplines, sectors, and regions.

Scholars studying inshore fisheries in Africa would be unaware of studies of resources in Africa. Sociologists would not be aware of the work done by economists and vice versa. Ostrom and others began to synthesize and map out the existing academic research.

In 2009, Elinor Ostrom along with Oliver E. Williamson was awarded the Nobel Prize in Economics for her analysis of economic governance, especially the commons. She is the only woman to have received the prize.

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The Peltzman Effect & Risk Compensation

Peltzman effect is a theory which states that people tend to increasingly engage in risky behaviours once a security measure has been mandated. This effect is named after Sam Peltzman, an economist who postulated the theory with the use of seatbelts in automobiles.

The original context of the theory was the regulation of risk as the government tries to make things safer by issuing new regulations. Peltzman used auto safety as a case study, where the government made people wear seatbelts and also regulated various other features in the manufacturing of automobiles, such as pop-out windshields and other protective devices which are meant to make us safer.

The Economics of Risk

According to economic theory, when you make things cheaper then you will get more of them.  This is what led to Peltzman postulating that when you make a car safer in this way, drives will adjust their behaviour in response to the perceived level of risk.

In other words, if driving becomes safer, the drivers will become riskier when driving. Hence, the increase in safety measures will be compensated by riskier behaviour. This is what economists call Risk Compensation. In the case of auto safety, Peltzman predicted that the increase in risk behaviour would lead to more accidents, that would partly or completely offset the safety benefits of the regulation.

Later, Peltzman performed a study to see what the effects of the first generation of automobile safety regulations were auto-related accidents. The study did not focus on the first order effect (driver safety) but on the global effect (did more people survive on the road or did the automobile death rate goes down).

Risk Homeostasis

The conclusion of the study was that there was no effect on the death rate but there was a reduction in the probability that you would die in an accident which is the main purpose of the device. However, this benefit was completely offset by more accidents and many accidents involve people who weren’t in cars that are protected.

The Peltzman effect shows that people tend to drive recklessly and with less attention since they felt safer in the car which leads to more accidents than when these safety devices came out. The ratio of fatalities in accident went down but there was an increase in the accident which offset the decreased fatality rate.

He then concluded that if government regulates risk or anything, there is going to be an incentive created for behaviours that offset some part of what the government is trying to regulate and it could be a complete, partial, or more than complete offset. And the main thing that this regulation does is that it makes the consequences of an accident less severe.

Examples of Risk Compensation

Although the Peltzman study used the auto safety regulations as an example of risk compensation, this phenomenon has been observed in a range of activities. A few examples would be:

  • The use of helmets in skiing, snowboarding and rollerblades has been observed to increase risky behaviour.
  • A popular aphorism amongst skydivers, named Booth’s rule nr. 2 states that the safer skydiving gear becomes, the more chances skydivers will take constant