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The Code of Hammurabi: The Best Rule to Manage Risk
https://www.farnamstreetblog.com/2017/11/hammurabis-code/ (11/23/2917)
Almost 4,000 years ago, King Hammurabi of Babylon, Mesopotamia, laid out one of the first
sets of laws.
Hammurabi’s Code is among the oldest translatable writings. It consists of 282 laws, most
concerning punishment. Each law takes into account the perpetrator’s status. The code also
includes the earliest known construction laws, designed to align the incentives of builder and
occupant to ensure that builders created safe homes:
229.
If a builder builds a house for a man and does not make its construction
firm, and the house which he has built collapses and causes the death of the owner
of the house, that builder shall be put to death.
230.
If it causes the death of the son of the owner of the house, they shall put to
death a son of that builder.
231.
If it causes the death of a slave of the owner of the house, he shall give to
the owner of the house a slave of equal value.
232.
If it destroys property, he shall restore whatever it destroyed, and because
he did not make the house which he builds firm and it collapsed, he shall rebuild
the house which collapsed at his own expense.
233.
If a builder builds a house for a man and does not make its construction
meet the requirements and a wall falls in, that builder shall strengthen the wall at
his own expense.
Hammurabi became ruler of Babylon in 1792 BC and held the position for 43 years. In the era of
city-states, Hammurabi grew his modest kingdom (somewhere between 60 and 160 square
kilometers) by conquering several neighboring states. Satisfied, then, with the size of the area he
controlled, Hammurabi settled down to rule his people.
“This world of ours appears to be separated by a slight and precarious margin of
safety from a most singular and unexpected danger.”
— Arthur Conan Doyle
Hammurabi was a fair leader and concerned with the well-being of his people. He transformed
the area, ordering the construction of irrigation ditches to improve agricultural productivity, as
well as supplying cities with protective walls and fortresses. Hammurabi also renovated temples
and religious sites.
By today’s standards, Hammurabi was a dictator. Far from abusing his power, however, he
considered himself the “shepherd” of his people. Although the Babylonians kept slaves, they too
had rights. Slaves could marry other people of any status, start businesses, and purchase their
freedom, and they were protected from mistreatment.
At first glance, it might seem as if we have little to learn from Hammurabi. I mean, why bother
learning about the ancient Babylonians? They were just barbaric farmers, right?
It seems we’re not as different as it appears. Our modern beliefs are not separate from those of
people in Hammurabi’s time; they are a continuation of them. Early legal codes are the ancestors
of the ones we now put our faith in.
Whether a country is a dictatorship or democracy, one of the keys to any effective legal system is
the ability for anyone to understand its laws. We’re showing cracks in ours and we can learn
from the simplicity of Hammurabi’s Code, which concerned itself with practical justice and not
lofty principles. To even call it a set of laws is misleading. The ancient Babylonians did not
appear to have an equivalent term.
Three important concepts are implicit in Hammurabi’s Code: reciprocity, accountability,
and incentives.
We have no figures for how often Babylonian houses fell down before and after the
implementation of the Code. We have no idea how many (if any) people were put to death as a
result of failing to adhere to Hammurabi’s construction laws. But we do know that human selfpreservation instincts are strong. More than strong, they underlie most of our behavior. Wanting
to avoid death is the most powerful incentive we have. If we assume that people felt and thought
the same way 4000 years ago, we can guess at the impact of the Code.
Imagine yourself as a Babylonian builder. Each time you construct a house, there is a risk it will
collapse if you make any mistakes. So, what do you do? You allow for the widest possible
margin of safety. You plan for any potential risks. You don’t cut corners or try to save a little bit
of money. No matter what, you are not going to allow any known flaws in the construction. It
wouldn’t be worth it. You want to walk away certain that the house is solid.
Now contrast that with modern engineers or builders.
They don’t have much skin in the game. The worst they face if they cause a death is a fine. We
saw this in Hurricane Katrina —1600 people died due to flooding caused in part by the poor
design of hurricane protection systems in New Orleans. Hindsight analysis showed that the city’s
floodwalls, levees, pumps, and gates were ill designed and maintained. The death toll was worse
than it would otherwise have been. And yet, no one was held accountable.
Hurricane Katrina is regarded as a disaster that was part natural and part man-made. In recent
months, in the Grenfell Tower fire in London, we saw the effects of negligent construction. At
least 80 people died in a blaze that is believed to have started accidentally but that, according to
expert analysis, was accelerated by the conscious use of cheap building materials that had failed
safety tests.
The portions of Hammurabi’s Code that deal with construction laws, as brutal as they are (and as
uncertain as we are of their short-term effects) illustrate an important concept: margins of safety.
When we construct a system, ensuring that it can handle the expected pressures is insufficient.
A Babylonian builder would not have been content to make a house that was strong enough to
handle just the anticipated stressors. A single Black Swan event — such as abnormal weather —
could cause its collapse and in turn the builder’s own death, so builders had to allow for a
generous margin of safety. The larger the better. In 59 mph winds, we do not want to be in a
house built to withstand 60 mph winds.
But our current financial systems do not incentivize people to create wide margins of safety.
Instead, they do the opposite — they encourage dangerous risk-taking.
Nassim Taleb referred to Hammurabi’s Code in a New York Times opinion piece in which he
described a way to prevent bankers from threatening the public well-being. His solution? Stop
offering bonuses for the risky behavior of people who will not be the ones paying the price if the
outcome is bad. Taleb wrote:
…it’s time for a fundamental reform: Any person who works for a company that, regardless of
its current financial health, would require a taxpayer-financed bailout if it failed should not get a
bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also
some insurance companies and even huge hedge funds — should be strictly regulated.
The issue, in Taleb’s opinion, is not the usual complaint of income inequality or overpay.
Instead, he views bonuses as asymmetric incentives. They reward risks but do not punish the
subsequent mistakes that cause “hidden risks to accumulate in the financial system and become a
catalyst for disaster.” It’s a case of “heads, I win; tails, you lose.”
Bonuses encourage bankers to ignore the potential for Black Swan events, with the 2008
financial crisis being a prime (or rather, subprime) example. Rather than ignoring these events,
banks should seek to minimize the harm caused.
Some career fields have a strict system of incentives and disincentives, both official and
unofficial. Doctors get promotions and respect if they do their jobs well, and risk heavy penalties
for medical malpractice. With the exception of experiments in which patients are fully informed
of and consent to the risks, doctors don’t get a free pass for taking risks that cause harm to
patients.
The same goes for military and security personnel. As Taleb wrote, “we trust the military and
homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get
promotions and the honor of a job well done if they succeed, and the severe disincentive of
shame if they fail.”
Hammurabi and his advisors were unconcerned with complex laws and legalese. Instead, they
wanted the Code to produce results and to be understandable by everyone. And Hammurabi
understood how incentives work — a lesson we’d be well served to learn.
When you align incentives of everyone in both positive and negative ways, you create a system
that takes care of itself. Taleb describes Law 229 of Hammurabi’s Code as “the best riskmanagement rule ever.” Although barbaric to modern eyes, it took into account certain truisms.
Builders typically know more about construction than their clients do and can take shortcuts in
ways that aren’t obvious. After completing construction, a builder can walk away with a little
extra profit, while the hapless client is unknowingly left with an unsafe house.
The little extra profit that builders can generate is analogous to the bonus system in some of
today’s industries. It rewards those who take unwise risks, trick their customers, and harm other
people for their own benefit. Hammurabi’s system had the opposite effect; it united the interests
of the person getting paid and the person paying. Rather than the builder being motivated to earn
as much profit as possible and the homeowner being motivated to get a safe house, they both
shared the latter goal.
The Code illustrates the efficacy of using self-preservation as an incentive. We feel safer in
airplanes that are flown by a person and not by a machine because, in part, we believe that pilots
want to protect their own lives along with ours.
When we lack an incentive to protect ourselves, we are far more likely to risk the safety of other
people. This is why bankers are willing to harm their customers if it means the bankers get
substantial bonuses. And why male doctors prescribed contraceptive pills to millions of female
patients in the 1960s, without informing them of the risks (which were high at the time). This is
why companies that market harmful products, such as fast food and tobacco, are content to play
down the risks. Or why the British initiative to reduce the population of Indian cobras by
compensating those who caught the snakes had the opposite effect. Or why Wells Fargo
employees opened millions of fake accounts to reach sales targets.
Incentives backfire when there are no negative consequences for those who exploit them.
External incentives are based on extrinsic motivation, which easily goes awry.
When we have real skin in the game—when we have upsides and downsides—we care about
outcomes in a way that we wouldn’t otherwise. We act in a different way. We take our time. We
use second-order thinking and inversion. We look for evidence or a way to disprove it.
Four thousand years ago, the Babylonians understood the power of incentives, yet we seem to
have since forgotten about the flaws in human nature that make it difficult to resist temptation.
Student name Project #1 Red font highlights instructions—fulfill and delete
POL 108 Political Theory Comparative Survey CRN 22009, Spring 2018
Hammurabi
Born Babylon, Iraq, died 1750 Babylon, Iraq. Reigned 1792 BC to 1750 BC as 6th king of First
Babylonian Dynasty. Known for Code of Hammurabi.
Use theorist’s name as Title then provide brief resumé giving theorist’s birth – death dates;
place of birth, place of working life at profession(s); main oeuvres, publication dates (50 words)
Balancing (define each of the 5 variables using theorist’s words—average 50-120 words each)
state—
rule of law—
legitimate coercion to agreement—
transparency and accountability of leaders—
correlation of specialization and division of labor with social stratification —
Dichotomize using quotes, examples—be brief & specific
Production-Extraction
division of labor among
all perform work undifferentiated
specializations
by rota
Regulation conscript volunteer expert/merit conscript volunteer expert/merit
stratified
Socioeconomic
allocationsdistribution
fluid,
mobile
One or two sides of one sheet may be used. Analyze and select discerningly. Get the important
ideas only, just those worth remembering.
Apply instructions in red, then delete them—cite by simplified Chicago Manual of Style
Sources
Primary
Textbook
Online
Christian Science Monitor Daily online 1/12/1018
Why Presidential Language Matters
Presidents are normally very controlled in their use of language. They know they’re on
stage virtually all the time and that everything they say can, and will, be used against
them by their critics. When they speak harshly – or swear – they generally do so for
effect. Lyndon Johnson would berate individual lawmakers because he wanted to bend
them to his will, not just to express emotions. But President Trump’s incendiary
outburst Thursday during a meeting with lawmakers about a possible bipartisan
immigration deal was yet another breach in presidential norms. In dismissing
developing countries with a scatological slur [“S-hole countries”], and rejecting
immigrants from those countries while embracing those from Norway, Mr. Trump used
harsh words in a divisive manner. (On Friday, he disputed the use of the offensive
language.) The incident seemed reflective of the president’s apparent disinterest in
uniting the nation beyond his electoral base, or the world. “One of the most powerful
weapons in achieving this end is language,” says Brian Balogh, a history professor at the
University of Virginia. “Using language that appeals broadly, and avoiding language that
infuriates, demeans, incites, is crucial to achieving this end.”
Student name Project #1 Red font highlights instructions—fulfill and delete
POL 108 Political Theory Comparative Survey CRN 22009, Spring 2018
Hammurabi
Born Babylon, Iraq, died 1750 Babylon, Iraq. Reigned 1792 BC to 1750 BC as 6th king of First
Babylonian Dynasty. Known for Code of Hammurabi.
Use theorist’s name as Title then provide brief resumé giving theorist’s birth – death dates;
place of birth, place of working life at profession(s); main oeuvres, publication dates (50 words)
Balancing (define each of the 5 variables using theorist’s words—average 50-120 words each)
state— region
district
domain
tract of land
quarter
area
part
realm
home
province
kingdom
commonwealth
republic
rule of law— rules
regulations
statute
decree
enactment
ordinance
edict
fiat
canon
legitimate coercion to agreement—
transparency and accountability of leaders—
correlation of specialization and division of labor with social stratification —
Dichotomize using quotes, examples—be brief & specific
Production-Extraction
division of labor among
all perform work undifferentiated
specializations
by rota
expert/merit
Regulation conscript volunteer
conscript volunteer expert/merit
Socioeconomic
alloca-
tionsdistribution
stratified
fluid,
mobile
One or two sides of one sheet may be used. Analyze and select discerningly. Get the important
ideas only, just those worth remembering.
Apply instructions in red, then delete them—cite by simplified Chicago Manual of Style
Sources
Primary
Textbook
Online