Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [21]
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5
Haven’t You Switched to Risk Management 2.0 Yet?
Moving Toward a New Risk Architecture
ERWANN MICHEL-KERJAN
Interdependency is the defining element of the 21st century.
—Tony Blair, former British prime minister
The general surprise that came with the series of catastrophes and crises that have unfolded one after another over the past few years—terrorist attacks, natural disasters, financial crises, to name a few—reminded me of excerpts of The Plague, the famous novel written some sixty years ago by French author, journalist, and Nobel Laureate Albert Camus: “There have been as many plagues as wars in history, yet always plagues and wars take people equally by surprise.”
This is mainly because, in addition to the human behaviors introduced in previous chapters, there is another one that seriously challenges the traditional economic view of rationality: most of us are myopic. We all focus on what is likely to happen tomorrow, not necessarily on how our actions today can have long-term consequences several years from now. So we don’t see the seeds of disasters that are being sown until it is too late. The 2008-2009 financial crisis is just the latest—and perhaps most devastating—economic illustration of the stunning consequences of myopic behaviors.
Until recently, few world leaders or thinkers would have pegged the accelerating rhythm of large-scale catastrophes as one of the biggest economic and social challenges in the foreseeable future. But the evidence is now telling: If you consider the twenty-five most costly insured catastrophes in the world between 1970 and 2008 (all adjusted to 2008 prices), all of them occurred after 1987. Furthermore, of these twenty-five events, more than half have occurred since 2001, twelve of them in the United States. This new era of catastrophes poses a major challenge for decision making: Dealing with an average of one or two such catastrophes every twenty years is one thing; dealing frequently with five or ten on many different fronts, as is currently the case, is quite different.
And I predict that this trend toward more catastrophes will continue, in large part because of hyper-concentration of population/value in high-risk areas and also, as Paul Slovic and I discuss in the Introduction to this book, because globalization is making the world much more interconnected than ever before, such that risks are becoming fundamentally more interdependent.
To learn how people will/should behave in this new risk environment, we must increase our comprehension of it.
MANAGING AND FINANCING EXTREME EVENTS: A NEW ERA CALLS FOR A NEW MODEL
The catastrophe risk management field is actually at a crossroads today, as we are faced with extreme events of a totally new nature and scale. Although considerable research has been done to better understand disasters, recent events have seriously challenged the established paradigm.
Not very long ago, disasters were considered to be low-probability events because they did not occur often. That assumption was very reassuring for the economist: The expected loss of these events (understood here as the potential loss associated with a disaster multiplied by the probability of that event occurring) was often relatively low.