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better understand these risks or make more rational insurance decisions, especially given that terrorism risks depend on many factors that evolve over time (protection in place, foreign policy, etc.). In addition, the societal response to those harmed by such hazards is likely to be fraught with errors. As with natural disasters, it is important to establish mechanisms that foster self-protection and insurance so as to bolster what is likely to be the inadequate role of individual decisions.

RECOMMENDED READING

Kunreuther, Howard (1976). “Limited Knowledge and Insurance Protection.” Public Policy 24, no. 2: 227-261.

Kunreuther, Howard, et al. (1978). Disaster Insurance Protection: Public Policy Lessons. New York: Wiley.

Kunreuther, Howard, and Mark Pauly (2005). “Insurance Decision-Making and Market Behavior.” Foundations and Trends in Microeconomics 1, no. 2.

National Safety Council (2004). Injury Facts. Itasca, IL: National Safety Council.

Viscusi, W. Kip, and Richard J. Zeckhauser (2003). “Sacrificing Civil Liberties to Reduce Terrorism Risk.” Journal of Risk and Uncertainty 26, nos. 2-3: 99-120.

Viscusi, W. Kip, and Richard J. Zeckhauser (2006). “National Survey Evidence on Disasters and Relief: Risk Beliefs, Self-Interest, and Compassion.” Journal of Risk and Uncertainty 33, nos. 1-2: 13-36.

PART FOUR

MANAGING AND FINANCING EXTREME EVENTS

PART FOUR BUILDS ON the first three sections of the book and on what we now know about human behavior in a catastrophic environment. Here, the focus is on how individual behavior translates into collective actions (or the lack of such actions). In other words, how do we deal with catastrophic risks as a society? And how can decision sciences and economics show us how this could be radically improved?

The first two chapters (18 and 19) look at how the U.S. government prepares for, manages, and ensures financial recovery after natural disasters and terrorist attacks, and what that means in the aftermath of the global financial crisis. The authors disclose how the federal government has, over the years, played an increasing role in providing financial coverage and relief to many more people and for a larger range of risks. However, federal disaster expenditures nowadays are rarely aligned with good economic rules and sound insurance principles. Relief is mainly dictated by political and media pressure in the aftermath of a disaster, rather than being based on clear attribution rules defined and known to all beforehand.

The next two chapters (20 and 21), more technical, focus specifically on the 2008-2009 financial meltdown to analyze how the combination of individual behavioral biases and misaligned incentive systems led to this historic crisis. A lot has been written on this matter already, but the authors show in a very novel way how economic theory and lessons from other major crises (e.g., with respect to post-catastrophe insurance markets) can shed some new light.

The next four chapters (22 to 25) look at environmental risks and climate change—an issue that includes the irrational politics of environmentalism and the question of how some conservatives in the United States abandoned the responsibility to conserve. Today, the citizen, the politician, the entrepreneur, and the judge are concerned about environmental problems and about how to efficiently allocate limited resources given the great uncertainty surrounding the future climate, yet they don’t necessarily have a strong scientific basis for decision making. But this can change. In a more technical discussion (Chapter 24), we will also look at an innovative proposal for long-term insurance contracts (as opposed to the traditional one-year contracts we currently know). Such contracts, if adequately designed and marketed, could address a host of concerns ranging from climate change to land use. But will insurers agree?

Part Four ends with a discussion of one critical policy question. Climate change is predicted to severely affect the poorest countries on the planet, which will likely be devastated more