The Five Neglects:The Five Neglects:Risks Gone AmissRisks Gone Amiss

Alan Berger, Case Brown, Carolyn Kousky, and Alan Berger, Case Brown, Carolyn Kousky, and Richard ZeckhauserRichard Zeckhauser

Presentation toPresentation toSociety for Risk Analysis – New England ChapterSociety for Risk Analysis – New England Chapter

September 17, 2009September 17, 2009

Elements of Rational Analysis of RiskElements of Rational Analysis of Risk

1.1. Consideration of probabilityConsideration of probability2.2. Valuation of potential benefits and lossesValuation of potential benefits and losses3.3. Accurate use of (subjective) probability and Accurate use of (subjective) probability and

statisticsstatistics4.4. Delineation and evaluation of all available Delineation and evaluation of all available

alternativesalternatives5.5. Incorporation of all benefits and costs accruing Incorporation of all benefits and costs accruing

to the decision makerto the decision maker

5.a. Incorporation of all benefits and costs 5.a. Incorporation of all benefits and costs accruing to the decision maker and all external accruing to the decision maker and all external partiesparties

The Corresponding Five NeglectsThe Corresponding Five Neglects

1.1. Probability neglectProbability neglect

2.2. Consequence neglectConsequence neglect

3.3. Statistical neglectStatistical neglect

4.4. Solution neglectSolution neglect

5.5. External risk neglectExternal risk neglect

Probability NeglectProbability Neglect

Especially likely for emotionally charged risksEspecially likely for emotionally charged risks If the risk stirs strong emotions, WTP to If the risk stirs strong emotions, WTP to

reduce risk is same no matter the probabilityreduce risk is same no matter the probability Can lead to spending too much on low-Can lead to spending too much on low-

probability, but high emotion risksprobability, but high emotion risks Example: cancer experimentsExample: cancer experiments

Willingness to Pay in Dollars for Elimination of Arsenic Risks

Harvard Law School Results, 2008Mean (Median)

[Number of Subjects]

Probability Unemotional description Emotional description

1/100,000 241 (100) [20]

250 (100)[13]

1/1,000,000 59.21 (25)[19]

211 (200)[15]

Consequence NeglectConsequence Neglect

Most likely for non-salient and difficult to Most likely for non-salient and difficult to imagine risks; virgin risksimagine risks; virgin risks

Leads us to prepare too little for low-Leads us to prepare too little for low-probability, high-consequence risksprobability, high-consequence risks

Posner’s example: large asteroidPosner’s example: large asteroid

Statistical NeglectStatistical Neglect

Biased assessment and updatingBiased assessment and updating– Availability HeuristicAvailability Heuristic– Too much updating for virgin risks, too little for Too much updating for virgin risks, too little for

experienced risksexperienced risks

Misunderstanding of probabilityMisunderstanding of probability– Assuming small samples are representativeAssuming small samples are representative– Gambler’s FallacyGambler’s Fallacy– The Normal Thinking Trap, Fat TailsThe Normal Thinking Trap, Fat Tails

Source: Barton, C. and S. Nishenko (2003). Natural Disasters—Forecasting Economic and Life Losses.

USGS Fact Sheet. Available online at: http://pubs.usgs.gov/fs/natural-disasters/index.html

Power Law: p(x)=CxD log(p(x)) = log(C) + Dlog(x)

Another example: Failure to recognize fat tails

Solution NeglectSolution Neglect

Cannot choose most optimal response if it is Cannot choose most optimal response if it is not even considerednot even considered

Could be due to:Could be due to:– Status quo biasStatus quo bias– Political capital accumulated for current solutionsPolitical capital accumulated for current solutions– Limited time and attention of decision makersLimited time and attention of decision makers

Specific types:Specific types:– Natural capital neglectNatural capital neglect– Remediation neglectRemediation neglect

Solution Neglect and Climate ChangeSolution Neglect and Climate Change

**Geoengineering efforts, even preliminary research on the subject, may Geoengineering efforts, even preliminary research on the subject, may diminish mitigation efforts. But if climate change has a reasonable chance diminish mitigation efforts. But if climate change has a reasonable chance of being a mega-catastrophe, fervent development efforts are merited.of being a mega-catastrophe, fervent development efforts are merited.

MitigationMitigation AdaptationAdaptation Geoengineering*Geoengineering*

ProblemProblem ++ ++ --

CatastropheCatastrophe ++++ ++++ ++

Mega-Mega-

CatastropheCatastrophe++++ ++ ++++++

External Risk NeglectExternal Risk Neglect

Imposing risks on othersImposing risks on others This type of externality is hard to address b/c:This type of externality is hard to address b/c:

– Changes in risk levels are not visible and may be Changes in risk levels are not visible and may be difficult to trace to a sourcedifficult to trace to a source

– Created by many and imposed by manyCreated by many and imposed by many– Those imposing risk in a different jurisdictionThose imposing risk in a different jurisdiction– Intergenerational bargaining not possibleIntergenerational bargaining not possible

Case Study: Pontine MarshesCase Study: Pontine Marshes

980 sq. km, south of Rome980 sq. km, south of Rome Drained with canals, now heavily pollutedDrained with canals, now heavily polluted External risk neglect: farmers and industries External risk neglect: farmers and industries

polluting water; illegal wells leading to polluting water; illegal wells leading to saltwater intrusionsaltwater intrusion

Natural capital neglect: Overcome now with Natural capital neglect: Overcome now with P-REX project to use wetlands to clean waterP-REX project to use wetlands to clean water

The Pontine Marshes, or Bonifica dell’ Agro Pontino, is located approx. 60KM southeast of Rome and comprises an area 780 sq. km.

Soon after coming to power in the late 1920s, Mussolini strove to do what his predecessors couldn’t – to change the face of Pontine Marshes and thus win prestige for his regime. It would also fulfill his long-term belief in the “rural vocation of the Italian people.” Il Duce took the Marshes as his pet project, frequently visiting and propping the landscape as the backdrop for malaria eradication, wheat farming and small-scale agrarian urbanism.

In December 1928, the Italian government approved a blueprint for the area’s reclamation, handing

responsibility to the Consorzio dell’ Bonifica di Littoria. Here you see the beginning of major canal excavation.

By 1935, 2600km of canals were created in the Marshes.

Agricultural Nutrient Plume, Canale Badino-Pontine Marshes. With a lack of resources from national and regional funding sources, the province is focusing on educating farmers to use best managemet practices, such as not fertilizing before rainfalls and wet season cycles, and reducing dependence on chemical-based ammonium nitrate fertilizers. Photo by Alan Berger 2007-08

Case Study: U.S. MinesCase Study: U.S. Mines

600,000 inactive and abandoned mines in U.S.600,000 inactive and abandoned mines in U.S. 100,000 square miles of mines and waste100,000 square miles of mines and waste External risk neglect: acidifying water bodies External risk neglect: acidifying water bodies

and polluting them with heavy metalsand polluting them with heavy metals

166. Bingham Canyon Mine (copper). 2000. Near Salt Lake City, Utah..(From Reclaiming the American West, Alan Berger)

What Can Help?What Can Help?

Conscientious assessment of current risk Conscientious assessment of current risk conditionsconditions

Re-education on environmental systemsRe-education on environmental systems Risk deliberations with multiple stakeholdersRisk deliberations with multiple stakeholders Long-term perspectiveLong-term perspective Knowledge of and attention to the Five Knowledge of and attention to the Five

NeglectsNeglects