Why the Modern Economy Is So Hard to Understand

Those who follow internet discourse closely may recall the once-popular term "stochastic terrorism." It refers to outcomes that are predictable in aggregate but contain strong random elements. Such violence is statistically predictable, yet individual incidents remain impossible to forecast.

Recently, I have been thinking about what might be called a "stochastic economy"—where we pay costs to avoid outcomes that are statistically likely to occur but individually rare. My conversation partners agree that some improvements exist, like flat-screen TVs, but they feel we have lost as much as we have gained. Monitors have clearly improved, but social media has destroyed our attention spans.

Consider automobile safety. Most readers have seen articles noting that the average price of a new car now exceeds $50,000. For those of a certain age, this figure may seem unbelievable. In 1990, the average new car cost $15,000—about $38,000 in today's dollars. For most households, a car is an important and unavoidable purchase that weighs heavily when assessing their financial situation. Does this dramatic price increase mean our economic circumstances have worsened?

Not necessarily. One reason car prices have risen is that as the economy has grown, consumers have chosen to invest their extra money in larger, more luxurious vehicles. SUVs now outsell regular passenger cars. Another reason is the advanced features now standard in new vehicles, including stability control systems and advanced driver-assistance systems. Today's consumers are purchasing vehicles with far better performance and improved features than those available 30 years ago. This shows in traffic accident statistics: In the United States, 1.7 people died per 100 million miles driven in 1995, compared to 1.2 in 2024.

Compared to the value of human life, paying a few thousand dollars more per vehicle seems almost free. But when you are actually at the dealership buying a car, it feels different. While improved vehicle safety has significantly reduced the probability of dying in a traffic accident, that probability was already quite low to begin with. Here we enter the "stochastic economy"—paying substantial sums to prevent accidents that are statistically likely to happen to someone but not particularly likely to happen to you.

Many things we spend heavily on share this characteristic—car insurance, homeowners insurance, and especially healthcare services, which account for nearly one-fifth of U.S. GDP. Few areas have seen such clear improvements in quality of life. Cancer immunotherapy and the development of mRNA vaccines that cut the pandemic short are prime examples. Yet debate over these quality-of-life improvements remains fierce.

Statistically, you may contract one of the diseases for which treatments have advanced dramatically over the past 30 years. But you probably do not fully appreciate the extent of those advances, nor do you know what treatment you might need. That is why we pay insurance premiums each year—preemptively covering the cost of care we might require. Until you actually get sick, it is hard to know what benefits you are receiving for your premiums. Policyholders see only ever-rising premiums.

Probability helps explain the mystery between strong economic indicators and poor economic sentiment. It also helps explain why many seemingly ordinary people quietly cheered the assassination of UnitedHealthcare CEO Brian Thompson. The public deeply despises insurance companies, feeling they take money and give nothing back.

But this is not true. Insurance companies are legally required to spend most of the premiums they collect on policyholders' medical services. In 2024, insurers' average profit margin was less than 1%. Yet most people do not know this. They simply feel they pay a lot of money and receive no benefits. Our brains are not skilled at understanding this kind of uncertainty. Unfortunately, while our brains seem to process stochastic terrorism well enough, they appear unable to properly comprehend the stochastic economy.