Smithsonian magazine reports why government intervention tends to go awry:

[H]umans have an inborn tolerance for risk-meaning that as safety features are added to vehicles and roads, drivers feel less vulnerable and tend to take more chances. The feeling of greater security tempts us to be more reckless. Behavioral scientists call it “risk compensation.”

[...]

[In 1975,] Sam Peltzman, a University of Chicago economist, published an analysis of federal auto-safety standards imposed in the late 1960s. Peltzman concluded that while the standards had saved the lives of some vehicle occupants, they had also led to the deaths of pedestrians, cyclists and other non-occupants. John Adams of University College London studied the impact of seat belts and reached a similar conclusion, which he published in 1981: there was no overall decrease in highway fatalities.

There has been a lively debate over risk compensation ever since, but today the issue is not whether it exists, but the degree to which it does. The phenomenon has been observed well beyond the highway-in the workplace, on the playing field, at home, in the air. Researchers have found that improved parachute rip cords did not reduce the number of sky-diving accidents; overconfident sky divers hit the silk too late. The number of flooding deaths in the United States has hardly changed in 100 years despite the construction of stronger levees in flood plains; people moved onto the flood plains, in part because of subsidized flood insurance and federal disaster relief. Studies suggest that workers who wear back-support belts try to lift heavier loads and that children who wear protective sports equipment engage in rougher play. Forest rangers say wilderness hikers take greater risks if they know that a trained rescue squad is on call. Public health officials cite evidence that enhanced HIV treatment can lead to riskier sexual behavior.

All of capitalism runs on risk, of course, and it may be in this arena that risk compensation has manifested itself most calamitously of late. William D. Cohan, author of House of Cards, a book about the fall of Bear Stearns, speaks for many when he observes that “Wall Street bankers took the risks they did because they got paid millions to do so and because they knew there would be few negative consequences for them personally if things failed to work out. In other words, the benefit of their risk-taking was all theirs and the consequences of their risk-taking would fall on the bank’s shareholders.” (Meanwhile investors, as James Surowiecki noted in a recent New Yorker column, tend to underestimate their chances of losing their shirts.) Late last year, 200 economists-including Sam Peltzman, who is now professor emeritus at Chicago-petitioned Congress not to pass its $700 billion plan to rescue the nation’s overextended banking system in order to preserve some balance between risk, reward and responsibility. Around the same time, columnist George Will pushed the leaders of the Big Three automakers into the same risk pool.

“Suppose that in 1979 the government had not engineered the first bailout of Chrysler,” Will wrote. “Might there have been a more sober approach to risk throughout corporate America?”