Thursday, February 25, 2010
We often quote the seemingly perplexing statistics that despite the significant risks faced only 17 percent of Americans have a flood insurance policy and only 12 percent of homeowners in California buy earthquake insurance. Persuading people to buy coverage to protect them in the event of disaster remains a key challenge. So it was with great interest that we read a February 19 op-ed in the online edition of Newsweek by professors Erwann Michel-Kerjan and Paul Slovic. The article will be printed in Newsweekâ€™s March 1, 2010 international edition. The op-ed starts out by stating that the earthquake in Haiti is an omen of what is to come as we face a growing trend of more frequent and larger scale natural disasters. Yet even as the world becomes more dangerous â€“ more than half of the planetâ€™s 20 costliest catastrophes since 1970 have occurred since 2001 the authors note â€“ it appears that human reason is failing in the face of disaster. Hereâ€™s what they say:
Economic analysis helps determine how people will respond to this more dangerous world. But the traditional economic view suggests that human actions can be predicted as if people were always completely informed, perfectly responsive to economic fluctuations, and rational, in the sense of having stable, orderly preferences that always maximize their individual economic well-being. In fact, disasters seriously challenge this view.”
The authors go on to note that the current situation in Haiti highlights three critical elements where behavioral scientists have found the rational predictions of many economists flawed: first, people donâ€™t think disasters will happen to them; second, we fail to learn from othersâ€™ misfortunes; and third, humans canâ€™t grasp the full significance of disaster statistics. Suffice to say and without spoiling the authorsâ€™ conclusion, understanding human behavior will play a key role in managing catastrophic risk in the years ahead. Something to think about.