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Take the number of vehicles in the field, (A), and multiply it by the probable rate of failure, (B), then multiply the result by the average out-of- court settlement, (C). A times B times C equals X...If X is less than the cost of a recall, we don't do one.

What applies to the Car Industry (via Dialogue from Fight Club) applies to the Chemical Industry in Spades. DuPont Knew (or strongly suspected) that C8 & (Teflon) were causing Cancers, Birth Defects etc. But the cost was going to be too high to move away so they all "kicked the can down the road".

Time to sock them with a multi-billion dollar verdict after some of these people are locked up for long periods.

This whole thing reminds me of GE not only dumping pollutants into the Hudson River - but eventually spending more on legal battles to avoid a cleanup, than the cleanup would have cost. It's sickening.

But your point is correct - it's a cost of doing business. You put the cost of the cleanup and being sued against the cost of not polluting in the first place. Sadly this algebra is useful in externalizing hidden costs of pollution.

For all uninitiated in Fight Club (like I am) here's the quote that explains the reference:

"Narrator: A new car built by my company leaves somewhere traveling at 60 mph. The rear differential locks up. The car crashes and burns with everyone trapped inside. Now, should we initiate a recall? Take the number of vehicles in the field, A, multiply by the probable rate of failure, B, multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of a recall, we don't do one.

Business woman on plane: Are there a lot of these kinds of accidents?

Narrator: You wouldn't believe.

Business woman on plane: Which car company do you work for?

Narrator: A major one."

The crazier thing is that for negligence torts (cars would be products liability, which is different), that's exactly how the law works.

It's called the "Hand Formula" and you are only liable for negligence when PL > B, where P is the probability of loss, L is the gravity of loss, and B is the cost of avoiding the risk.

In practice though, it can be hard to argue that sort of thing. It's a little academic.

Yes, of course. In a resource-constrained world, i.e. the world we live in, spending more on prevention than the expected loss makes no sense.

Refusing to spend $10 to avoid a $5 expected loss is not negligence, it's economic common sense.

(You should still be liable for the loss if someone else is experiencing the risk. You should be liable to compensate them fairly, but it's not negligence).

In fact in a world with scarce risk prevention resources, PL = B is not even a sufficient criteria to say you should spend to prevent the risk, because there might be opportunities to prevent greater losses elsewhere; i.e. you should not be investing to prevent PL = B type risks if there exists PL >>> B type risks. (For a finance analogy, if you are capital-constrained, you don't want to put your money in any investment with a positive ROI, you want to put you money in investments that have the highest ROI.)

In other words, spending $10 to prevent a $10 expected loss risk when there is an opportunity to prevent a $100 expected loss risk for the same expenditure makes no sense.

But since we're not smart enough to cooperate and globally allocate the total risk-prevention budget to minimize losses, locally and in terms of personal responsibility PL = B is a decent rule.

Ford Motor Company Management 101

Actually, if we go by recent claims, GM is the winner (loser) here

GM didn't even make that calculation, did they? I thought they just sort of covered it up and hoped nobody would notice. Say what you will about cold-blooded calculations, but at least Ford analyzed the situation.

GM had a bad engineer, as well as poor engineering practice (not properly tracking Engineering Work Orders and part changes), along with poor understanding of the ignition/electronic system.

Source - Valukas Report

Disclaimer - I work for GM

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