The problem of risk management

Wharton Magazine, organ of The Wharton School at the University of Pennsylvania, has a very interesting article about risk management. Here's an excerpt.

Howard Kunreuther and Robert Meyer have staked their careers on the belief that human beings are at heart irrational, doomed to repeat the same mistakes over and over - unless we find a way to overcome our wiring.

. . .

That’s the Risk Center’s raison d’etre. It was founded in 1984 with the goal of providing guidance to companies and governments on managing "low-probability, high-consequence events"; a less technical way of putting this is to say that the Center is a think tank for a world facing guaranteed disaster. The Center is a highly interdisciplinary place, calling on the expertise of professors who study economics, statistics, mathematics, insurance and risk management, marketing, psychology, environmental science, political science, geography and meteorology, not only from Wharton but also from universities across the world.

. . .

Instead of rationality, the world seems to be driven by randomness, ignorance, venality and procrastination, and good intentions are stymied by the quirks of human psychology. The question, then, is what to do about it - how to anticipate and mitigate human misperceptions of risk, before we make another round of doomed decisions. This complex problem is the focus of a recent book edited by Michel-Kerjan and Slovic called The Irrational Economist (written in honor of Kunreuther) in which many of the world’s top behavioral economists express their own ideas about human decision biases and how to avoid them.

. . .

These days, Michel-Kerjan is increasingly interested in truly large scale catastrophes and in developing innovative solutions that create value (a topic he teaches in the Wharton MBA program). Looking at the U.S., "I think Katrina may look like a baby in the next few years," he says. "Do you know what the insured exposure on the coast of Florida is, for example?" By 'insured exposure', he means the total dollar amount of all property that could be obliterated in a hurricane or a flood. "Is it $100 billion? Five hundred billion? What do you think?"

Five hundred billion?

"It’s 2.5 trillion dollars," he says. "It’s close to $1 trillion for Texas. And it’s $2.4 trillion for the state of New York. From the Texas to Maine coast, you’re talking close to $8 trillion of insured assets on the coast. Just the coast. If you combine that with the potential for more intense hurricanes in the next few years ... " He pauses. "That might be very bad. If we don’t mitigate it. If we don’t invest in risk-prediction measures." Now you are warned.

There's more at the link.

If you're at all concerned about the future - your future - economically, politically, geologically, geographically, or in any other way - you should read this article. It's food for thought.

Peter