Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [66]
There is another influence, too, which might be called the survivability effect: We are more inclined to engage in risk if we believe that the odds of a truly catastrophic outcome are negligible. It is just this underestimation of extreme outcomes that many have used to explain the widespread collapse of investment banks and lending institutions in 2008 in the United States: Banks undertook risky leveraging strategies in the belief that even the worst-possible default scenario would be survivable.
In the context of natural hazards, a dramatic comparative illustration of this effect is the curious difference one sees in the geographic distributions of settlement patterns in the world’s two most cyclone-prone populated land masses: Northern Luzon in the Philippines and South Florida in the United States. Both display highly asymmetric geographic distributions of cities, but of opposite natures: Whereas the beaches along the southeast coast of Florida are lined with cities, those along the east coast of Luzon are largely unpopulated, with most residents living in the center or west coast of the island. While many historical causes can be posited to explain these two settlement patterns, the beneficial effect that Luzon enjoys by not having its major population centers located in the east cannot be overlooked: Because most severe typhoons that make landfall on Luzon arrive from the east, most of their damaging energy tends to be spent by the time major cities such as Manila are affected. Major cities in South Florida, in contrast, enjoy no such protective barrier; hurricanes arriving from the east land with full force, making the area prone to such catastrophes as the Great Hurricanes of 1926 and 1928 and Hurricane Andrew in 1992. Why do we see such different adaptations? One explanation has to do with timing and economics: Luzon was settled at a time when typhoon risks from the east could be neither predicted nor mitigated, and there was little economic benefit from locating ports and cities on the riskier windward side of the island. In contrast, settlement in South Florida was not only supported by a tourism economy for which beach locations held real value but, even more important, took place at a time when hurricanes were seen as predictable and their damage controllable (or at least recoverable). Hence, in addition to the paradox of increased scientific knowledge, we have the paradox of survivability: The greater the number of individuals who come to believe that our steps toward mitigation make even the worst storms survivable, the more inclined communities may be to put this survivability to the test.
THE AGENCY PROBLEM
While to this point we have focused on individuals’ psychological impediments to mitigation, it is important to emphasize that in many situations the fault lies in what economists have referred to as the agency problem: the tendency for society to put the ultimate decision-making power in the hands of policy makers who are not at risk of suffering the consequences of mitigation-investment mistakes. After the great San Francisco earthquake and fire of 1906, for example, local authorities were initially moved to enact stronger building codes—but these were quickly removed from the books when contractors complained that they were slowing the pace of the city’s reconstruction. Likewise, many of the homes and businesses along the Mississippi Gulf Coast that were destroyed by Hurricane Katrina were structures that were built in the same location—and to the same codes—as structures that had been destroyed by Hurricane Camille in 1969. The reason that homes were rebuilt to old codes was the same as that which drove the San Francisco rebuilding: As strong