From Earthquakes To Climate Change, Why Our Biases Under-Prepare Us For Risk

by Mark Trexler

As a risk management professional, I worry about getting caught unprepared for risk events I should have reasonably foreseen.  So we have mini survival kits in each car, we’ve scanned all the family photos so they can’t be lost in a fire, and we have taken photos of everything we need for potential insurance purposes (all stored off-site).

And then there’s “The Big One” – the 9.0 earthquake the seismologists say is overdue here in the Pacific Northwest, which would (or, more accurately, will…..) wreak absolute havoc on infrastructure (and, in all likelihood, my house, which is built on the side of a hill).  We’ve made sure that the house is properly bolted down, so it might not simply surf down the hill, and we’ve purchased earthquake insurance.

Our next project was to put together the recommended emergency kit with water, food, and other critical supplies for the aftermath of the earthquake.  We certainly hope that FEMA will be at the door soon after an earthquake, or at least make food and shelter available nearby.  But if The Big One hits, we could easily be on our own for days or weeks (sound familiar in the aftermath of Super Storm Sandy?).  Given that fact, how can I as a responsible risk professional be without an earthquake emergency kit?

Unfortunately, the problem is a little more complicated than simply recognizing the risk of a major earthquake.  A freeze-dried food salesman related the following comment he had heard at a recent home show: “Why should I buy your freeze-dried foods?  I have guns.  In an emergency I’ll just come and take your food!”  That puts a whole new spin on managing earthquake risk!  No longer is it just the earthquake, it’s the social fallout, and the impact of the social fallout on the utility of the risk management measure being considered.

Do we need to add guns and ammunition to my earthquake kit, and learn how to use them?  That’s an entirely different risk management calculation.  Maybe we should drop the whole idea of worrying about that earthquake preparedness kit, and assume it will work out for the best.  Because after all, even in the worst case we won’t be in any worse shape than our neighbors.

What’s interesting about this chain of thinking about personal risk management is how closely it parallels a lot of corporate thinking about climate change and corporate climate risk.  It’s common to hear the following explanation for the relatively low priority often given to climate risk (whether policy risk or actual climate impacts):

  • “If and when climate policy or climate events become really material to us, policy-makers will realize that we (e.g., electric utilities) are so important that we’ll be made whole by taxpayers or ratepayers. Spending a lot of time now worrying about climate risk isn’t likely to benefit shareholders (and could even penalize them if we’re later told that because of our preparations we don’t qualify for the future assistance being given everyone else).”
  • “If something really bad were to happen in terms of climate change or climate policy, something that we couldn’t be made whole from, then we probably couldn’t have adequately hedged for that risk anyway given financial and decision-making constraints.  And in any case, everyone else including our competitors will also be in a really bad position, so it’s unlikely to really affect our long-term competitive position.”

These lines of thinking have little to do with whether climate risk is real, just as my decision-making on an earthquake kit might have little to do with whether earthquake risk is real. Instead, it has to do with decision-makers’ own perceptions of whether managing such risks makes sense in light of other tradeoffs and constraints.  If a good deal of support is available when bad things happen, incurring the costs of pro-active risk management today may deliver little benefit.  If that support isn’t available when really bad things happen, plausible pro-active risk management today might not make much of a competitive difference anyway.

Managing risk is rarely free, and aggressive risk management can look pretty costly when compared to other priorities looking for funding!  At a personal level, even as a risk professional, if I have the choice between an earthquake kit that will be taken from me at gunpoint when I need it, and a vacation cruise today that I’ll be able to look back at with fondness for all my remaining years, maybe that cruise is the better way to spend limited dollars!

These are the kinds of calculations and prioritizations that individuals and organizations make when it comes to risk management.  What this means is that any given risk management response cannot be interpreted solely through the lens of the hazard itself.  A lack of aggressive corporate action on climate change could reflect a basic lack of climate change understanding, or perhaps even environmental bad faith, but it is more likely a reflection of self-interest as perceived through the filter of decision-maker incentives and the decision-makers’ perception of risk.  So if decision-making incentives discourage risk management, just as current flood insurance programs can incentivize rebuilding  (sometimes repeatedly) in flood-prone areas, then we shouldn’t be surprised when decision-makers engage in levels of risk management that appear suboptimal from a societal perspective.

Understanding the incentives facing corporate decision-makers across companies and sectors in managing risks is probably the best predictor of the risk management measures we should expect to see (and is the basis of the entire game theory literature).  Looking for ways to influence those incentives in favor of the outcomes stakeholders and society might prefer is much more likely to deliver the wished-for results than simply bemoaning corporate inaction.

This is not to suggest that companies shouldn’t, even purely on the basis of self-interest, be engaging in more active strategies to manage climate risks.  Through the evolving field of behavioral economics and seminal work like Daniel Kanneman’s book Thinking Fast and Slow (Farrar, Straus and Giroux, 2011), we are beginning to understand in more detail just how important a whole range of cognitive biases are to our perception and management of risk, and how severely those biases can divert us from accurately prioritizing and quantifying complicated risks.

Corporate executives are just as prone to these cognitive biases as anyone else, and they’re the ones making decisions about climate risk management.  As a result they could be telling themselves a biased story about self-interest.  Some, for example, are likely to be significantly under-estimating the potential competitive advantage available to them, as well as over-estimating the costs.  Some are over-reliant on past experience to assume they’ll be made whole in a future crunch, forgetting that other industries have suffered the consequences of public (and judicial) opinion catching up with the science in areas like smoking, asbestos and hazardous waste.  Some are over-emphasizing the conclusion that in a real crisis they’ll be no worse off than their competitors.  If their competitors are (proverbially) dead, how great a decision-making criterion is that really?

These are all conclusions it can be very easy to reach given how our brains actually function, but they can lead companies astray in effectively quantifying and prioritizing both the relative risks they face and the risk management strategies that are likely to be in their real (rather than initially perceived) self-interest.

The bottom line is that there’s still quite a bit of work to do in better understanding and perhaps modifying the incentives to which decision-makers are responding, and in better understanding, quantifying, and communicating corporate risk to the benefit of corporate decision-making.

Thinking about Super Storm Sandy, for example.  It might not make a lot of sense to have told Port executives in advance that they’d lose their bonus if their Port is shut down by a hurricane.  Such an outcome may simply be beyond their control.  But what if they were told that their bonus would be increased by 10 percent for every day that their Port is up and running before a nearby Port?  And what if they were provided with a much more customized understanding of the consequences they personally could face from future hurricanes (in terms of job security and other variables) and of ways to manage those consequences?

Decision-makers would likely be a lot more likely to look at risk in more detail, setting the stage for better risk-based decision making.  Much of this comes back to the incentives decision-makers face, and the importance of perceived risk.

By the way, we did put together that emergency earthquake kit.  Even if we might not turn out to be any better off than everyone else, having the kit in place will put us in a much better position out of the starting gate.  That’s where I want to be regardless of the possibility of other risks down the line. (Did you know that fire extinguishers can make pretty good defensive weapons?)

Mark Trexler, Director of Climate Risk for DNV KEMA Energy and Sustainability, has 25 years of experience with business climate change risk management. Mark is co-author of The Changing Profile of Corporate Climate Change Risk, published in September by Dō Sustainability Publishers.  (For 15% off the book, Climate Progress readers can enter code CP15 here.

15 Responses to From Earthquakes To Climate Change, Why Our Biases Under-Prepare Us For Risk

  1. Mike Roddy says:

    Interesting, Mark, thanks. We didn’t have a lot of hope for corporate preparedness anyway- it’s going to be up the dreaded gubmint.

    I hope your office isn’t in downtown Seattle. I visited the tallest building there a few years ago and asked about its earthquake rating. Originally designed for a 7 (prior to our knowledge of the Cascadia quake), the facilities manager told me that it had been upgraded to an 8 something. You can’t retrofit a skyscraper to that level of safety. A 9 near Seattle would eclipse Sandy in damage, and cause more deaths if it happens during business hours.

  2. The lack of political will to prepare to survive a mega earthquake in the Pacific Northwest and its aftermath — from the individual level up to state and provincial governments — dooms people who will be caught in a rupture of the Cascadia Subduction Zone. There will be way too many deaths, critical injuries, illnesses, thirsty & hungry people, cold & wet people during the winter, no police or fire protection, no effective medical care and many other traumatic conditions.

    The imminent earthquake will be North America’s largest natural disaster for the past several centuries.

    Sadly, the earthquake will have to happen, before effective political will results in retrofitting infrastructure (bridges, roads, utility delivery systems, critical buildings, food & water sources, etc), before individuals take steps to survive.

    Seismology is relatively new. Identification of the danger from the Cascadia Subduction Zone is four or five decades old, with much more recent data analyses throwing more light on the problem.

    Even with this knowledge, the majority of those who know about the CSZ deny the significance of the danger. When advocating preparation to friends & neighbors, and I don’t get “What is the Cascadia Subduction Zone?”, I have heard replies saying: “I’m not going to live my life worrying about it.” or “I filled a gallon water jug in my garage.” or “That will be the end times and I expect to be in the rapture.” One neighbor wondered if a recent illness tainted my reasoning abilities. A friend suggested I seek psychiatric counseling.

    One of my solutions to the danger is to move back to Arizona, where I came from three years ago, at least on a snow bird basis during the Northwest’s six months of rain and cold. It will be easier to survive an earthquake’s aftermath during the warmer part of the year.

  3. Joan Savage says:

    I expect you have more useful comments to say about what incentives would help, a topic you touched on briefly.

    Although I know that the earthquake is an example, and I don’t want to over-compare a quake to climate change, there are some differences that affect how I think about climate change risk.

    A major earthquake is a certain but rare event, while we are uncertain about when it will hit. The active phase is brief.

    Climate change is unlike an earthquake as it isn’t located in a single region and is not a single event in time. It seems intuitively obvious to me that assumptions about preparation have to get past old ideas like the rescuer-from-outside or the we’ll-just-start-over.

  4. I think most corporations are approaching climate change the same way they approach almost everything else: as an exercise in game theory.

    Artificial corporate “persons” have no soul and no real accountability to any fellow beings, except as it is conducive to the bottom line. Some have a longer view of the bottom line, but they don’t have a view of something fundamentally different from it, like the genuine well-being of their customers.

    We’re all trapped in this system. Mike is right–the dadburn gubmint is the only organization that can cope with this. And we can see how that’s working out for Obamacare. It took every ounce of political capital Obama had, and provoked the formation of a virulent opposition party. Hm, I wonder what will happen when the gubmint tells Exxon they have to leave all their reserves in the ground after some date certain. That’ll go over big, I’m sure.

  5. Bart Laws says:

    The most important cognitive bias is simply denial of unpleasant truths. It’s just easier and feels better to pretend it will never happen.

  6. While I agree with what you’re saying, I don’t think Obamacare is a very good example. It became such an enormous struggle because Obama (1) refused to lead, other to lay out some principles and, (2) refused to simply extend Medicare and make it available to everyone, thus bogging the entire country down in a largely fruitless debate for a year.

    They could have extended Medicare and made it voluntary, not compulsory, and everyone would be covered, affordably, and the Tea Party would not exist. Only the for-profit insurance companies would have been upset: does make you wonder about Obama’s priorities.

  7. There isn’t going to be any “preparedness” if climate change keeps developing at its present pace. Sea walls and home emergency kits won’t feed people when California looses its snowpack at the same time the Midwest becomes a dustbowl. Hurricane after Hurricane will hit the northeast and have cumulative impacts as the sea level rises relentlessly. Forest fires will rage out of control, wiping out entire urban-wildlife interface zones. It will all be way beyond the capacity of society to respond meaningfully, and we could be in that fix by 2060.

    It’s fine for people to have personal survival kits at home, and hope for the best after the next traumatic event. But climate change is way beyond a traumatic event. In someone’s words, it’s ongoing “hell and high water.”

    Corporations and preparedness? Some of the CEO’s are probably buying land and stashing arms in “safe havens” around the globe. They might be among the last to go when it all comes down.

  8. prokaryotes says:

    I agree it is good to start preparing, with a kit too. The question is not if, but when.

    But on the bottom line we have a situation where the entire gravitational field of the planet will adjust. There won’t be an isolated big one what troubles me, but many quakes. The last time sea level rose quickly, earthquake activity jumped 300% (McGuire 1997).

    Though i witnessed the last big California quake in Oceanside and luckily it was not a big impact quake. But i wonder how much you can prepare, if at all.

    Because the trigger for the quake could mean extensive precipitation or maybe it happens during a drought/heatwave. So you must prepare for a situation with multiple threats. Only a few can do this.

  9. prokaryotes says:

    McGuire conducted a study that was published in the journal Nature in 1997 that looked at the connection between the change in the rate of sea level rise and volcanic activity in the Mediterranean for the past 80,000 years and found that when sea level rose quickly, more volcanic eruptions occurred, increasing by a whopping 300 percent.

  10. Ozonator says:

    I believe most of the biases come from designed ignorance. Paid geologists say that it is impossible to predict quakes and so much of the threat is treated by regular people like AIDS under the Reagan years. Federal help came out of “nowhere” with FEMA trailers for Katrina and bipartisan support for Sandy. Such topics and the supporting science and infrastructure rarely can compete with discussions of the local football coach and latest NRA voting plan for home grown nukes and AGW dumping.

  11. Ben Beccari says:

    Unfortunately we humans rarely weigh up risks in any sort of calculated sense. The human brain is just not set up to deal with high consequence low probability risks and any rationalisations (FEMA will help me, we’ll all be dead, there’s nothing I can do) are things we make up to post hoc to justify the fundamental failings within our psyche.

    Organisations can be even worse. In Marc Gerstein’s book, Flirting With Disaster, he details how organisations consistently fail to manage risk despite individuals within the organisation correctly assessing the danger. Under-investment in training and risk management capabilities; political, financial and time pressures; groupthink and an organisational culture that punishes those who speak out all contribute.

    The question is how can we create better institutions that can recognise and appropriately react to risks, whether they be earthquakes or climate change.

  12. Mulga Mumblebrain says:

    His one priority is to advance the interests of those who recruited him at college, gave him his first job and who launched and financed his political career. He is quite assiduous in looking after them. The plebs-not so much.

  13. Mulga Mumblebrain says:

    The elite seem to imagine that they can ride out this storm, and survive with their wealth and power intact, possibly enhanced. That is how mad they are.

  14. paul magnus says:

    We just dont have an apreciation of risk at any level. Look at Chernobyl, Fukushima and GW.

    We didnt lose the plot, we never had it in the first place.

    Thinking this is why the Universe does not seem to have any life forms less stupid than us.

  15. Aaron Lewis says:

    Stealing food after a disaster, may work for short while, but it is not sustainable, for a disaster that lasts as long as AGW.

    My father fought in WWII. He had a certain mental toughness. When he was 83, three local thugs with guns staged a home invasion robbery. My father put them down with a claw hammer. And, Wyatt Earp like to use a hammer handle as he enforced the law against cowboys in Dodge City. What wins is mental toughness, not guns.

    It takes mental toughness to look disaster in the face and plan for it. It takes mental toughness to think about disaster and put effort into building the skills to survive.

    Many of use have first aid skills. We assume, that all injured persons will be transported to a medical facility rapidly. It may be time to consider disasters, where it may be days before the injured can get medical attention and plan accordingly.