Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [22]
But in the first few years of the twenty-first century, the world has faced a string of catastrophes of a totally new dimension. In fact, there has not been a six-month period in the past few years without a major crisis that simultaneously affected several countries or industry sectors. In the terrorist attacks of September 11, 2001, a superpower was challenged on its own soil in an unprecedented way. After 9/11, the reality of international terrorism became clear, and national security became a top priority on the agenda of the United States and many other countries. The event has had an enduring impact on the rest of the world as well. Hurricane Katrina, a violent but long-anticipated hurricane, overwhelmed a vulnerable coastline, met an unprepared government, inflicting historic economic damage and lasting social impacts.1 The massive failure of the electric power distribution system—a ten-second event in August 2003 that resulted in a massive United States-Canada blackout, demonstrated how human error and short-term competitive pressure can result in poor risk management that, in turn, jeopardizes our critical infrastructures. The December 2004 tsunami was responsible for the deaths of nearly 300,000 people in just a few hours due to lack of an alert system. And more recently, in May 2008, a major earthquake in the Sichuan province in China killed nearly 50,000 people, just a few weeks after a major cyclone killed over 100,000 in Myanmar.
The severity of these events demonstrates that the world is changing, and that we have entered a new era. On many critical points relating to extreme-event preparedness, the conventional economic thinking has been wrong. Conventional thinking holds that risks are mainly local and routine—that it is possible to list all untoward events that could happen, determine their probability based on past experience, measure the costs and benefits of specific risk protection measures, and implement these measures for each risk. Many organizations and governments are making decisions using risk and crisis management tools based on these outdated assumptions. As a result, they do not have the agility needed to move quickly to respond to unplanned events and global risks that are arising at an increasing rate. This failure to prepare adequately impacts not only the organizations and governments themselves but also a number of others with which they are interconnected.
A NEW RISK ARCHITECTURE IS STILL TO BE DEFINED
The aforementioned extreme events seem quite varied in terms of the types of catastrophes involved, the countries affected, and the impacts on the rest of the world. But if we look closely it is possible to see that these events are related in the sense that they define a new pattern. And this is why there is a need for a new risk management architecture. Below I offer a view of six defining features of this new architecture, as summarized in Figure 5.1.
FIGURE 5.1 Six Key Features of a New Risk Architecture
Feature 1: Extreme Costs, Extreme Benefits
This new risk architecture is first and foremost characterized by a much wider variance in possible losses and gains than ever seen before. The recent events in the United States have had unprecedented economic consequences. Given the hundreds of billions of dollars of economic losses due to catastrophes that have occurred in the United States since 2001, it might be difficult to remember that when Hurricane Hugo hit the country in 1989, it was the first catastrophe to inflict more than $1 billion of insured losses. But times have changed. Hurricane Katrina in 2005 killed 1,300 people and forced 1.5 million people to evacuate—a historic record for the nation. Economic damages totaled nearly $150 billion, a third of which was covered by private insurance (for wind damage, about $45 billion) and public