Tesla Crashes, Faulty Airbags, and How We Perceive Risk

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 7, 2016 2:29:50 PM

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riskOne story I’ve been following is the recent fatal crash of a Tesla Model S. The car, which was set to autopilot, apparently collided into the side of a truck while the Tesla driver was watching a movie, killing him. Since then, there have been several other Tesla crashes that may have involved the autopilot function failing while the drivers weren’t paying attention.

Although I understand the interest in the topic—I want a flawless automatic car just as much as the next person—I’m kind of baffled by the tone the coverage has taken, with the focus on the faulty autopilot software. For me, the story highlights the challenges consumers (and investors) face in discerning the risks that really matter.

A tale of two car defects

Unfortunate as the situation is, the Tesla driver took a beta product and intentionally pushed it past the stated limits. In other words, he decided the risks were justified by the benefits (i.e., watching a movie while driving). Clearly, he underestimated the risks. Based on the overall tone of the coverage, the media also seems to have expected the Tesla autopilot feature to operate essentially flawlessly, despite the company’s explicit warnings.

As a counterpoint, consider the news coverage (and reality) of another major auto safety crisis: exploding airbag inflators. As you've probably heard, the inflators, which can become defective over time, have resulted in a number of deaths.

Here’s the thing: according to a U.S. Senate report, those same defective airbag inflators are still being installed in new vehicles. Unlike the Tesla crashes, which resulted from inappropriate use of experimental features despite company warnings, we have here a deliberate decision to continue using known defective products. As far as I’ve seen, that storyline is getting far less play in the media.

I suspect many buyers of cars with known defective airbags aren’t even aware they’re taking that risk. And the actual risk level, in terms of the number of cars and the likelihood of a problem, is much higher than with the Tesla software. Buyers of cars with defective airbags are taking a bigger gamble, and doing so unknowingly. 

For investors, the key is identifying the real risks

For investors, too, the media is often not as helpful as it could be in pointing out the real risks. Investing involves risk, and we have to make every effort to understand what those risks actually are.

The Brexit news, while high profile, ultimately turned out to be not much of a worry. Conversely, the ongoing devaluation of the Chinese yuan, the very high valuation of the U.S. stock market, the Italian banking crisis, and other potential systemic events aren’t getting nearly as much coverage. Another example is the “will they or won’t they?” Federal Reserve interest rate narrative, which ultimately matters much less than slowing productivity.

Long story short, what shows up in the newspapers is rarely what will matter over time.

As investors, we need to focus on what truly matters, and that is the whole aim of this blog. I do respond to headlines quite a bit, because that's what people are anxious to hear about, but I’m more concerned with the metrics I track each month in my Economic Risk Factor Update and Market Risk Update posts. In my opinion, those and other longer-term trends can help us identify the risks that will matter over time.

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