Human Reason vs. Catastrophes

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 Newsweek’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 – more than half of the planet’s 20 costliest catastrophes since 1970 have occurred since 2001 the authors note – it appears that human reason is failing in the face of disaster. Here’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 don’t think disasters will happen to them; second, we fail to learn from others’ misfortunes; and third, humans can’t grasp the full significance of disaster statistics. Suffice to say and without spoiling the authors’ conclusion, understanding human behavior will play a key role in managing catastrophic risk in the years ahead. Something to think about.

2 thoughts on “Human Reason vs. Catastrophes”

  1. It rather suggests that it is merely part of the natural order (of the planet and of economics) that communities should be destroyed when disaster strikes.

    If I may assert that personal savings is the most rudimentary form of insurance, then it might appear that it is only in the last two generations or so (in this country) that our culture has really tended away from insurance. Indeed, we may observe that insurance and fiscal responsibility are closely linked, and attitudes toward them erode together.

    I daresay that our legislators have done their share to influence America’s disrespect for saving: we get tax breaks for suffering from interest on our debts; meanwhile government-controlled inflation eats away at savings, which encourages Americans to spend as soon as possible (often even before funds come into one’s possession).

  2. Claire,

    Unfortunately the U.S. Government continues to support this risky behavior by supporting programs like Citizens Insurance in Florida. People are not rational and we love living in beautiful but dangerous locations. This will never change.

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