The Not Unreasonable Podcast
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The Not Unreasonable Podcast
Howard Kunreuther on Behavioral Economics of Risk
Howard Kunreuther is the foremost authority on applying behavioral economics to unlikely, high consequence events. I remain astounded that Howard's teachings are not part of the educational canon for all insurance professionals. This is important stuff!
In this episode we discuss:
* Cognitive bias and how it impacts society generally and insurance in particular
* How we might overcome cognitive bias in our decision making
* Prioritization of risk
* How politics really is the mediating force for discussing risk
* Does voter irrationality give us cause for hope?
show notes at:
http://notunreasonable.com/?p=7470
youtube link:
https://youtu.be/wxSsddUAIFU
Twitter: @davecwright
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Social Science of Insurance Essays
My guest today is Howard Kunreuther. The James G Dinan Professor Emeritus operations information and decisions department of the Wharton School and CO-Director Emeritus of the Wharton risk management and Decision Process Center. Howard trained as an economist and is the author of numerous books insurance and behavioral economics, mastering catastrophic risk and the Ostrich Paradox to name a few that I've enjoyed, on how society can better manage low probability, high consequence events. Howard, welcome to the show.
Howard Kunreuther:Nice to be with you, David.
David Wright:First question, so much of the literature and writing on risk, and focuses on our cognitive biases and overcoming them. So let's say that you could wave a wand and eliminate or cognitive biases, what would be different about that world and the world we live in today?
Howard Kunreuther:Well, I think the big difference would be, we would be thinking in a very, very different way about long term sort of issues that tend not to be on the agenda of most people. We are all very myopic, say myself included in many decisions that I have made, I try to avoid that, but we behave that way. And we have a set of other biases that lead us to ignore the kinds of things particularly if we're talking about low probability, high consequence disasters, because if we're optimistic, we assume it's not gonna happen to me. And we have amnesia, we forget about things that have happened in the past, unless they're very, very salient. And even then longer term, we will forget. So even hurricanes that that have occurred, we won't remember them. If even if we've been involved in something, a few of five or 10 years later, we, we also have amnesia, and that's part of all what I'm talking about simplification, we often think about the world by saying, this is not going to happen to me, the probability is so small, I'm not even going to reflect on the consequences. What's interesting is that after a disaster, if you have experienced it, then there's a tendency to say, My God, I don't want to have another one. And you don't focus on the likelihood of that event, you focus on the consequences, but it takes the disaster for you to actually do that. And finally, as a bias, we have hurting, we tend to follow our friends and neighbors. And the challenge really is that our friends and neighbors are behaving pretty much the way we behave. And so we're all going to be doing a similar thing. And it's really hard, we have a challenge to counteract that.
David Wright:So I think I see what you're described in there is a change in the internal state of folks. So we will understand things better, but what behaviors will like what outcomes in the world? Would we see that we have, for example, higher economic growth, or lower economic growth? Or would we have different institutions in our society? Would we have more buildings, less buildings? Like, do you have any predictions for what might occur in that world that we'd physically or we could measure that that would change?
Howard Kunreuther:Alright, well, let me start with something that we may talk more about. And that is something like climate change. And we would think about climate change very differently. If we were in a position to somehow think about how we have to address these biases, we would think about the long term impacts of climate change, we do know that there are more wildfires and hurricanes and floods. And I think everyone is aware of that. But the real challenge is to sort of think about what actions could be taken to avoid things that are going to get much worse, if we don't take those steps. Now, we would think about a pandemic in a very, very different way, we would have thought about the pandemic very differently if we had been thinking in terms of the longer term impacts of that back around February of 2020. And we would be doing a set of things not only us as individuals, but I thought the leaders of both the public sector and the private sector would be behaving differently, and taking steps to avoid the kinds of things that they may not be thinking about. So I think that we would be doing those things. Now when you're asked your question, how would we behave, what might be different, we would be designing very different buildings, we would be designing buildings that would actually be more avoid the challenges from earthquakes or floods and be safer against them and designed in that way, you might not have areas that are in wildfire areas that would necessarily be continued to be built. Because of the fact of what we've been having. We would be thinking much more long term, which is what we should be thinking about when we design buildings, but we often don't do that, because we're thinking more myopically.
David Wright:So I'll tell you something that kind of worries me about a world well, about kind of the concern on of weather and how we are Miss allocating our resources of worry and concern. It's that I think and tell me if the conception is right. But there's a kind of efficiency resilience trade off, right? So if you design different buildings, to what degree are you just saying we should have more expensive buildings, right? And if that case, we'll just invest more of our dollars right in in the building construction industry will have safer buildings Sure. But we'll also have lower GDP, right? Because we're spending more money and getting the same kind of real output as a consequence. And so is there, is there some world where if we were more resilient, we would therefore have lower GDP or lower growth? It might, is that a false dichotomy, or
Howard Kunreuther:I think it's certainly the case, that if it turns out that you are going to be designing structures in a different way, you may think about the upfront costs being higher than they were before, I'm gonna have to pay more for this build, right. And the way we would address that is to say, well, and I'll use something that we do on climate change. As an example, if we're going to move away from fossil fuels, to energy efficient technology, and let's say solar, and we want to put in solar panels on your house, which would make the house actually safer against climate, because you'd have less of less emissions, what people will say it's too expensive, we have to now put in solar panels, we're not going to do it. Here's one way, I think to view that, if you put in solar panels, you can actually show in many situations that your actual electricity costs are going to go way down over what they otherwise would be if you were using fossil fuels. And there's a lot of data to support that. So if one said, you know, we realize it may cost you $30,000, or $50,000, to put in the solar panels, we're going to tie it to your house, and we're going to give you a loan, so you can pay that back over the length of the mortgage of your house. And then we'll look at what your monthly costs are, or your annual costs are for actually having to provide that loan payment back, but will also show you what your electricity costs are going to be and how much lower they're going to be when you're being using solar rather than normal forms of electricity, you're not paying anything at that point, you may be able to sell some of the solar. And so when you do that, next year, you're going to be able to save money. And that addresses a myopia bias. And that's why people often don't do things. And if you also say, will also show you your property values are actually going to be higher by virtue of having solar. And if you had a normal house that was really being supplied by coal, that's an added bonus. So the real challenge that, at least I want to talk about here with you is we do have these biases. And myopia is the probably one of the most important ones, we have to find ways to overcome those biases. This is an example of how you would overcome that I can give you other examples as well. And we can tie into natural disasters if you'd like to.
David Wright:So I one of the things that I am, I wonder about is in what way, what are the what do we get from these biases? You know, like what is there must be some something beneficial about them, or some kind of reason why they exist? So if for example, like it just kind of comes back to my original question, the in some ways, the biases protect us from how little we really understand about the world, right, which is not a whole lot, but the universe, right? So like we, you know, our feeble minds can only perceive so much of the complexity of society, much less the universe. And so we kind of have to have these things to allow us to take any action at all right? So we're still gonna have to go about our day, we can't spend all of our time like, imagine we didn't have myopia, right? We would be kind of constantly worried about anything that could happen in the future. Right? You can overdo this in some sense, right? So I see like, there's a margin, at which point somewhere out here where we kind of extend the myopia out into the distance of the future, where we just get overwhelmed by what we see. Right? I'm just reading dune right now. Right? So Dune is this book, right? The movie came out, I don't know if you've read it. But the main character in the book, and in the following series, is that somebody who has precious you can foresee the future and many of the kind of instances and when he is is kind of going through these episodes, where he's seeing the future, he gets overwhelmed by the complexity of all the things that could happen in the future, right. And so to me, that's like, myopia protects us from having to endure that and allows us to, to kind of do anything at all with our lives. What do you think about that? Is there any benefit to it?
Howard Kunreuther:Well, I think you're hitting on a very, very important point. We would like to continue our lives the way we are leading them, right? Sure. And so, which is one of the biases inertia, we don't want to change if we can avoid having to change. So in some sense, the question is, how do we overcome that? Those bias, we're optimistic for the same reason and say, it's not this disaster is not going to happen to me. I don't want to think about it. And I think those are things that do protect us and force us and enable us really, to say we want to continue our current lives and what I'm we're talking about here is, are there ways that you can continue to lead your life right as you currently are leading it, and yet do a set of things to protect our environment and protect our homes and our houses. And so the first example that I gave you on the myopia bias is one way to do that, you're not going to have to change your life very much if you put in solar panels, or if you make your house flood resistant, what you will be doing is two things, you'll be avoiding a disaster that otherwise might occur. At the same time, you might actually be better off financially. And a lot of these things have to tie together, the financial aspects of this with some of these other biases. The reasons that people are actually fall having many of these biases is it protects them from saying, I'm not going to do the kinds of things that I otherwise would do. So I'd ask you the same question, David, if it turns out that you found out that you would have lower costs by having a solar panel in your house, and that it would save you on your electricity and monthly and next year, you can say to to yourself and to anyone in your family, look how much money I'm saving by doing that? Would that enable you to do that? Or would that change your lifestyle? Very much? And my guess is? I don't think it would?
David Wright:No, I probably wouldn't. And I read your paper on solar panels. And, and after reading it, I did Google solar panels. And you found that you couldn't get them, I found out that they're out of stock, like I cannot buy them in New Jersey,
Howard Kunreuther:well, that's good news. Maybe, maybe people are buying them now. And that's probably a good thing. So but you better get them at some point,
David Wright:I'm gonna have to now I have a flat roof on my house. So it creates a little complicated aren't as many vendors. But I think that you know, one of the things that I get in reading a lot of particularly more recent work, you know, of yours in the last, I don't know, probably 10, 20 years, maybe even, is there's all kinds of low hanging fruit, right? So there's tricks that we can pull on ourselves, institutions. And I know you've been influenced by Cass Sunstein and a lot of his work, where there are things that we can do that will allow us to improve our lives today. Right. But also, at the same time, you know, it's kind of things that maybe shouldn't exist, right. So it's sort of a bit of a win win situation where we can just be better off in the long and short term. As a consequence, we're consequence of worrying more about about low probability, high consequence events, that that feel like that should be impossible. Should I mean, should the economy have figured this stuff? Where's the inefficiency? What's the problem that isn't solving?
Howard Kunreuther:Well, you know, it's a very fascinating point that you're raising first, in the context of what Dick Thaler and Cass Sunstein have written on choice architecture and the way that you will use nudges and a variety of different ways to sort of get people to do things. What I think we're talking about here is not only that people are going to think about doing things, but then they're going to have the incentive to actually do it. And I think that's where the notion of these nudges are critically important. But what you really have to do is you have to figure out ways that people are going to feel comfortable doing that. So I would say that, if it turns out that you actually then make enable people to take the kind of steps that you would like to see them take, at the same time help out the economy in the process, which is what you're talking about and help themselves out, would you want to do it. Now let me give solar as an example, if you really got us to really think about solar energy in the way that one should be thinking about it, in my view, because it has an enormous impact on climate change. And it isn't just solar panels, it could be solar, in many ways, you're going to be opening up a lot of jobs, you're going to be opening up a number of things for the economy, you will be changing the economy. Now there are going to be groups that are going to be opposed to that, and we know that already
David Wright:gonna lose as a result, right, you're gonna move resources out of one sector, and then
Howard Kunreuther:you're gonna move into another so the coal industry is going to have a challenge with that, and people who are going to be supporting that have been big supporters and maintaining the status quo. But at the same time, you have to sort of try to figure out there are chat, there are always things that are going to require adjustments. And the status quo bias often exists. For that reason people want to just maintain because then they don't have to think about those adjustments. But these adjustments we're talking about have enormous long term benefits. If we can move away from from energy, the sun, the energy that we currently have, to light coal and oil, etc. to solar, we're in a and wind and nuclear, we're will be in a better position to deal with our environment in the future. There will be cost to some, but the people that we're talking about here in this example I've used in solar, they will not be suffering, they will actually benefit from that if they put it A solar panel. Now there are a lot of reasons that people haven't put them in. I don't want to get into that, because that's a paper there that one can look at if they're interested. There are lots of ways to address that problem.
David Wright:Now, one of the things that you also talk about is, it's one thing for us to move resources into solar panels. But then what happens on the dirty energy side is the price drops. And suddenly, it becomes more attractive to switch back, or, or, or at least rebalance out into something that becomes what what price drops the price of oil, the price of coal, it becomes cheaper to use those materials, because, you know, as you move the economy over to solar, right, you'll just sort of viewed that resource utilization go to price to go down just from a supply and demand standpoint, you're still producing this stuff, right? And so the price should go down?
Howard Kunreuther:Well, what you're saying is something like this, I want to make sure that everyone understands that myself included, you're saying when people switch from solar is going to be a glut and a supply of oil that people are not going to want. So the oil industry is then going to have to reduce their prices in some way to make them more attractive to people, right. And if you do that, then there may be some people who will decide that maybe they'll continue with oil or coal. And I think that's a second order problem, to be very honest. Okay. I think it's a second order problem for the following reason. And we don't know this, but I'll say it, if all of a sudden we find out the demand for coal has gone down, then there are going to be people in the coal industry who are going to have to find other ways to actually make a living. And the coal industry itself is going to have a challenge. And I recognize that that is one of the adjustments, and maybe you have to subsidize, maybe you have to do something to help that transition go forward. But as a result, you're going to have a lower supply of coal, because these people are going to find out and the industry is going to find out it isn't worthwhile to produce going where the price is so low, we can't even produce it anymore. And we can't and oil the same way. Because now we're gonna say people are not willing to pay as much as what we were actually, the cost us the supply, we got to get out of this industry. And now that is a problem. And that's one of the reasons we have this problem today is because of the fact that we do have a lot of vested interests that are going to say, we don't want to move away from coal from oil from these, because it is going to be very costly to us. And there's a lot of money that can go into trying to preserve the status quo. And what we're talking about is trying to move into something new and different here, in the sense that it will help us help our children and our grandchildren have a life that they otherwise won't have. If it turns out, we're going to maintain the kind of energy that we're currently having,
David Wright:I want to bring up this other kind of angle on a similar somewhat related issue, which is that of the need to sustain effort when protecting against risk. And this comes up in insurance industry all the time where you have to renew your policy. So you can't just buy a hurricane policy one year, and then cancel it the next year, and then feel like you're still doing anything for yourself if the hurricane didn't blow, right. So you have to somehow commit to, to engaging in these risk mitigation behavior in perpetuity. Right. And people tend to be a little more flighty than that, and want to move in and out of things. So we have this problem of sustaining our efforts in, in protecting ourselves over time.
Howard Kunreuther:Well, let me use your example that you currently have brought up, one of the things that we have not been very successful and actually promoting and implementing is multi year insurance policies. And that would be one way to address I think the point that you're raising, if you had a multi year policy, even a three or five year policy, and at the same time, you said to a homeowner, if you make your house flood proof, if you if you actually make it safer, your insurance premium is going to go down because they're going to be lower claims on that with floods. And by the way, if you do that your insurance premium is likely to go down by more than the cost of a loan to make your house safer. Now, what we've done is we brought these two things together, we brought the notion of improving your house, making it safer. And at the same time giving you an insurance policy if you do have a loss, and you still may have losses and floods and whatnot. So you will have insurance and you may be required to have insurance as we often have are required with homeowner's policies or living in flood prone areas, you're going to be protected against that. But you're going to have a lower premium because if premiums are risk based, they have to be risk based, not subsidize which is one of our principles that we put forward, you're going to be better off on doing that.
David Wright:So this interesting kind of meta point that's gonna emerge in my head here about policies that you you you like to advocate for, which is and you made this point where not only are they good in the long term, but they're also good in the short term or designing a way in which they are
Howard Kunreuther:right and that's critically in important for people to want to invest in it right? And
David Wright:so does it. Is it the case, then, that your policy agenda at any moment in time would be just a list of things that are both long and short term beneficial, and so you would not want or not want to advocate for would not think it's feasible to advocate for something that is just has a today cost for a longer period of time. And there's no, there's not necessarily immediate trade off when
Howard Kunreuther:I think you've hit a very important point, David, in terms of what you're raising, it is the long term issues here. That, frankly, is what we're talking about, at least when I'm talking with you about CO pandemics are a longer term set of problems, they may be a longer term than climate, they may be shorter term than climate change, because what happens in the next few months is going to then impact on the next few years, rather than talking about next year versus 20 or 30 years, but they are longer term problems. They're long term issues. And that is really what we're talking about. While I'm talking about with you, we want to think about how we can get protective mechanisms that do have longer term impacts. If you make your house safer, it's not just for next year, it's for the life of the house, unless something happens to the house. And so that's a longer term investment. But when people think about the cost of that investment next year, they're going to say, I don't think I want to do that I'm hoping I won't have a flood. I'm hoping I won't have a hurricane, I hoping I won't have a power problem or whatever. But you need to think about that. And I would also emphasize, it may not just be for the individual, it may be for the community and I want to use fire as an example of that. Individuals may decide that it isn't worth their while to invest in making their house safer against fire, because they're thinking about what the cost of a fire will be to their house. But when you have a wildfire like in paradise, California, it the most of the cost is the secondary costs is the fire spreading from one house to another Yep. And you're not going to deal with it. If people are reflecting on only the fire coming from a nearby forest, they have to think about the cost to their other homes. But if other homes aren't protecting themselves, then they're going to get a fire even if it turns out that it wasn't from an external, it comes from a neighboring house. So you need communities to be involved in this as well. And that would be true not just for fire, but for other disasters in terms of investment in terms of fraud, protection mechanisms and things of that nature. So I would say one of the real challenges we face is how do we look at that way individuals behave? Which is kind of what we've been talking about. And what's the role of public private partnerships, which might be the community it might be the federal government and maybe the world in some sense with climate change. How do we deal with that? And then there are other events that we won't be talking about, such as what are we dealing with? Are the safety of our environment, not of making sure that we have we continue with the way that we're dealing with our world today. pandemics being raising that issue now,
David Wright:I'm going to come back to pandemics actually in a sec, but the you know, you touched on something there which I've I just can't help myself. The there's a there's a literature that shows that groups are more rational than individuals, right. So groups of folks can get are literally more rational, they make great choices, which are more consistent, and transitive, and all those properties of rationality than individuals are. And it seems to me that from a policy standpoint, if you even have any hope of advocating for, for things like you are, then you you have some faith in the fact that at least at the societal level groups are more rational than individuals because we can enact a policy which we will adhere to right we vote for governments who then enact certain policies, which we think are socially beneficial in the long term, right. So there is hope, in the size in a groups of certain sizes, actually hurting us in the right direction. And I'm wondering what you think of that, like, at what point does it become, you know, if we have a neighborhood of people who aren't buying fire insurance up to a federal government of a country of millions or 100, millions of people that can enact rational policies for like, at what point do you have enough people in the group that you think there's enough rationality to actually start doing things that you think are right?
Howard Kunreuther:Well, I think the real I think you're absolutely right about the fact that groups often make better decisions than individuals because they learn from each other. There's a discussion that goes on, right, a whole set of reasons why they do that. But you need an institutional arrangement for that to happen. And let's take the fire example. How are you going to get your neighbors and everyone else to cooperate? Well, the best way to do that is through a community is through have some social organization. So what what we're talking about now is ways to get larger groups of people who are impacted by others to come together and you need institutional arrangements to make that happen. The most logical one to me is a borough, a community, a group of homes that are Coming Together, we have a very hard time doing that just on the basis of talking to a number of individuals, you need some kind of an institutional arrangement to make it happen. And the most logical one that we think about is a community, organization, or community. And then you can do the kinds of things you're saying. And this, of course, is done all the time in apartments, because you have, by definition, a whole group of people who are living in an apartment building, and an apartment building will be made safer, because they know full well that everyone in that in that apartment is going to benefit from that. And, and if you don't have them safer, they're going to be all sorts of things that are going to happen. And they may have requirements, you all have to have some kind of a fire extinguisher in your apartment, yes, in order to avoid the fire from spreading to others. But that's because of the fact that the apartment is a group of homeowners who by naturally coming together, CO CO living in the same place
David Wright:ever imposed constraints can pose it on each other. And regulations become important. Yeah, regulations and regulations are at all levels of these, these organizations. And I'm wondering if you have a sense, or an opinion? Or if there's a literature on this that at least I haven't seen of, kind of is there a curve of rationality like or is a curve of decision making effectiveness where wherever I'm one person, not great, right? cognitive biases, it's a mess, right? But then you go to like a, you know, community level, it's better? Does it keep getting better? The bigger the organization? Or is this sort of come over the top of the curve, and it gets worse again, and should go up to like the, you know, the government or federal government level?
Howard Kunreuther:A very interesting question, I think I would answer it by saying it depends on the risks that you're focusing on, it may very well be that for fire, you need a community, you may not necessarily need a community in the same way, if you're dealing with a tornado, for example, or a normal fire for that matter. That's one house that doesn't really spread the way a wildfire spreads. So it depends very much on what the what arrange what kind of a hazard you're talking about. And and even with earthquakes, you may not have the same kind of concern that you would have for an earthquake in terms of its spreading the way of fire does. So you have to describe essentially, as a first step, what's the risk, and what risk is a risk that is caused by different components. In the case of a fire, the risk can be caused by a primary component, which is a fire from outside, but it also can be composed by a secondary component spreading to others. And if you neglect the secondary component, you're you're going to miss the essence of how you're going to deal with fires in the future. And the mitigation may have to come not only for an individual doing it, but you may need to have certain kinds of regulations and requirements or incentives, because there could very well be some kind of homes that say I can afford to do that. And maybe you have to subsidize those homes, so that they will make their house safer to avoid a lot of damage that might otherwise occur. If they decided they were not going to install certain certain kinds of fire prevention message
David Wright:it. So a couple of thoughts come to mind here. One of them is this concept of regulations, right, which are costly in terms of economic efficiency, we have movements afoot in history, where deregulation has been positive for growth. But it seems to me that we're coming back at this question of efficiency versus resilience trade off, where we're going to sacrifice some efficiency by introducing rules so that we can constrain competition along certain dimensions. And I think in the insurance industry standpoint, you have capital requirements, which is the simplest thing, right? So in order to serve as the capital, you have to raise your prices, whereas a company with no capital, just funding out of premiums would have very low insurance prices would be a very brittle organization, with almost no resilience. Its there is this trade off there, right? Where we're trying to actually slow things down a little bit, so that we might, so we might protect ourselves and kind of the medium or or long term? I'm on the right track.
Howard Kunreuther:Absolutely right. regulations can be overused. And one has to ask, what is the benefit of the regulation? And what are the costs and if you do a set of things that are actually going to impede essentially, companies from doing the things that they would like to do and what not, we're all going to lose, because we're going to have higher prices for whatever is produced. And it's going to be inefficient from the point of view of what you just talking about. There are other regulations that could be a highly effective, and the one that I would mention, given what you've just said, is a building code. Yeah, a building code doesn't impose a lot of restrictions on anyone. What it does is it makes the house safer or the building safer, it does things and improves it in a number of ways. And in the process of having that kind of a building code. And at the same time, recognizing that in doing it, you have your house safer, it may be beneficial for every individual in terms of the cost that they're going to be paying next year in terms of their insurance premium using the example I just went into before. So I think one always has to ask the notion on anything that you're imposing on anyone, whether it's attacks the same way wood wood How much are we losing by having that tax? And how much are we benefiting? And the way I would want to view it in the context of what we're talking about is that for many of the risks that we're talking about, it isn't just the individual who was suffering, they're just a lot of other people who are impacted by that. That goes for for pandemics right now, and COVID-19. If we actually have regulations in place, or we actually require certain things, we require everyone to get vaccinated, there's been a lot of opposition to a vaccination. But if you say, Look at what's going to happen to our country, to our community and whatnot, if we don't have a requirement like that, maybe there'll be a reflection on the fact that everyone getting vaccinated is an important and good thing. But if there's a tendency to think just about the individual, and saying, Why should I get vaccinated, I'll be safe, I don't have to do anything. And forget about the fact that if every a number of people are feeling that way, we're all going to lose in the process, maybe you need a requirement for people to be vaccinated. And I would say that that has to be put on the table. When you make any decision.
David Wright:You don't come back to this kind of concept of how far is enough, right. So the, you know, let's be succumb to availability bias. Here, the COVID pandemic was very recent and very severe. And of course, we're going to be taking more steps in 2025, to prevent pandemics than we were in 2019. Right or 2018, right? Because it's very reasonable. Remember, even maybe for
Howard Kunreuther:us, we now experienced one, and we're thinking about what to do. And we hadn't done that up until we happen to go through the trout, the travails we're having now with COVID-19,
David Wright:yes, and, and we had a 1918 pandemic, yeah,
Howard Kunreuther:but no one even knew about that, I can tell you my little story, I mean, I will tell you that now, you may or may not want to have this in your recording, but I can tell it to you. And that is that, I will say that my mother lost her father, and a brother in the 1918 pandemic, and never said a word to anyone in the family of having gone through that. And I have talked to innumerable people since that time. And I've gotten the same story from lots of people that was never discussed, there were other things that were going on, as we know, there was a war going on big 119 18 and other things that played a role. But the fact is that they suffered enormously, and we never, ever heard it, I only started reading books on the 1918 pandemic, when we went through this recent one, where the number of people have done that, but there was no discussion at all.
David Wright:And you know, I'd say up until the, we're recording this during the conflict between Ukraine and Russia, and there's a nuclear war, it's come up again, as another thing, that was a very big deal for a long period of time, it's kind of receded from our consciousness. And the this comes to the, to the kind of deeper point I'm trying to make here, which is, there's a big list of low probability, high consequence events, maybe even an infinitely long list. If you want to include things like asteroids and aliens, I mean, that like can't believe, right? So where do you start to
Howard Kunreuther:cut that probability off? At some point, at some point asteroids? I'm saying the probability may be and let me also say, to the point that you're making, you also have to talk about two dimensions for any risk problem. And that's why I want to say that now, what's the likelihood of that event occurring? And what are the consequences? Now an asteroid can have enormous consequences. But if the likelihood is so small, we really have to think about the expected costs, which is the probability times the impact. And when you do that Austroads may be taken off the table, we can't necessarily do much about them anyway. But if we could do something about some of these risks, you may say the probability is so low that even if the consequences are So hi, maybe we'll just going to have to live with them. Yeah.
David Wright:And it's so I suppose. Do you think that there should be more resources invested in that? Like, are we have the probability threshold set? Right? How is the society? Should we make a decision like that, like, what can we do? Are we right when when we know we're right, that we've got the list that's at the kind of the optimal point?
Howard Kunreuther:Well, I think we came back, we went back to that, let me come back to a vaccine issue. I think we have to think about consequences, not just to the individual, which is what we often do on this, which is what's happened with vaccinations, I'm not gonna, why should I get vaccinated? And we have to think about what the impact is on a broader level and on a societal level and, and that's where climate change comes in, where people say, I'm not really worried about climate change. I don't think it's going to happen to me or I'm in a safe area and whatnot. I don't think that we should do anything about that as a society. But if it turns out that the consequences are going to be enormous to our children and grandchildren, and if we don't do something about it, we got to put that on the table. Now. Yeah, in order to be able to say to our palate to the political process, we got to pay attention, maybe a carbon tax is an important thing to have now, which is off the table. But maybe we need to have that economists. And I'm one of them would say, that's one of the best ways to deal with something like that. But we haven't had that yet. But if we put down and say, look at the consequences that are going to occur not just next year, but over the long term, and to who it will occur to, and that's why I bring in my children and grandchildren, maybe we can get people to pay attention where they haven't paid attention now, you know,
David Wright:the Cass Sunstein. And I think you did in the paper with Taylor on nudges, talks about availability entrepreneurs, right. So folks who are talking about risks, and we're trying to are not necessarily just risks, but talking about things people folks should focus on. And there's sort of always these people all over the place, who are who are trying to advocate for one or another thing, and it's a political advocacy. I know you, you actually know Mary Douglas, which was an influential intellectual on kind of my thinking about this, we talked about the link between uncertainty and on the political social decision making process. And so there's this deep thing, where there's this connection between folks who are trying to paint a political vision for themselves, which is kind of a forecast of the future that we might want to live in. And they therefore, trying to get us to focus on certain risks, saying, if you want to put put me in charge, so that I can help prevent this and this and create these other things over here, right? So to me, like, we can only hold so many things in our head at once. Right, and we kind of things are necessarily gonna fall out of the boat, right, we're gonna, in order to worry more about climate change, we have to worry less about pandemics probably not in this case, but maybe more or less about nuclear war or less, but asteroids are less about things that are maybe in between there. And one of the things that I kind of like, worry about a little bit is our total capacity for worrying about risks, you know, did we just run out of juice?
Howard Kunreuther:Right? I think I think that is an absolutely central point to our discussion right now. You need priorities. You need to be able to say to individuals and communities and to the world, whatever, whatever level you're talking about, what are the most important things that we can think about and put on the table right now, I'll give you my personal answer to that. There is nothing more important in my world, me personally, and my view of what we should be doing than climate change, there is nothing that I would put on the table higher than that. pandemics are very important. But the impact of pandemics can be dealt with climate change, if we don't deal with now, if we don't deal with solar, and if we don't do these things, now, we are going to be living in a world that I won't be living in, but my children and grandchildren will be living in that will really be a world that no one would want. And we don't think about those things at the moment. Because they are longer term, we say let's think about our normal life, as you have been talking about, let's think about next year. And so I think the biggest challenge that we face in prioritizing risks is to put on the table, not only what's going to happen next year, but what are the short little the longer term impacts not only to myself, but to the world and to society. And then I think we will get the right order in terms of where we should putting be putting our energy and worry and our money for that matter. That's why I talked about solar, if everyone in the country said that solar was the most important thing and other personal things, they could do electric cars and other things. And they said, we are doing this because we want our political leaders to pay attention to this issue now, and help us to do a set of things that will make this more feasible, we would be able to deal with climate change in a way that we're incapable of dealing with today.
David Wright:Now one problem that climate change brings squarely up in the pandemic a slightly less so but still there too, is the US is what 20% of world GDP something like that right?
Howard Kunreuther:Now, you may have the answer better than I do. So it's like it might be right, not
David Wright:a whole lot. I mean, a lot, but not like most of it. So you know, we can we can undertake all the policies we want. But most of the productive capacity of the planet is not inside of our borders. And so really critical concept here. When we're talking about institutions, we're talking about regulations, we're talking about rules and compulsion. Is that there bounding our if we may use a term sovereignty, right, so as an individual, I can't do whatever I want, and as a country are, maybe I shouldn't be able to do whatever I want. And so the question is this, would you say your favor of world government or some kind of supranational body which can force people to do things
Howard Kunreuther:for No, I don't favor that because I don't think it's feasible. And I don't think we would get that I would put on the table. What can we do with our existing structures and institutional arrangements that we currently have? And I would say that the most portant thing for us to be thinking about in our country in the United States, and hopefully would be carried on to the rest of the world is to preserve a set of things that we personally feel are critical and important. And that starts at the individual level, clearly, but then works its way up to the community or the group, and then the community, and then the state and then hopefully radiates out to others. And I think we have to think about what we can do, rather than what we should be doing. Well, government is not a feasible option right now, in my opinion, look at the challenges we've had with the United Nations in terms of indeed going to be dealing with so how can we think about world government? So the question is, we might have great ideas on what we should do. My issue is what's going to work that we can do, and what are the trade offs and you want to push for things that you feel can be implemented now or in the near future, right. And you can think long term by saying, here are some new technologies and new innovations, you don't want to anyway, disregard that. But you want to recognize that if you really want to try to do something, which is what I feel is important with something like climate change, we got to do these things in the next five or 10 years. And there may be some innovations that are going to take 20 years to come by. And if we don't do these things in the next five or 10 years, the innovations are not going to be able to really be valuable, because we all have changed the nature of the world that we're living
David Wright:in. So it seems to me that I mean, at least I can't think of a mechanism for behavioral change for advocacy for regulation that say, it's anything other than I mean, at least in kind of principle, at the point of a rifle, right? Where, you know, let me look at the political mess that every society is in, and ours is no exception. When when we want to produce things like climate policy, you know, think of carbon tax and cap and trade. And, you know, I'm from Canada, which is even, you know, historically a little more amenable to some of these concepts. That was a disaster in Canada as well. Right. So, you know, when we go through a kind of deliberative political process, he's, you know, at the social level, it just doesn't seem to go anywhere within a country, much less between countries. And so if in order to actually achieve something on a global scale, I mean, it seems to me like the, the the call antidotes to cognitive bias that you propose and talk about it. And I agreed they're effective. But it seems to me the scale of their effectiveness is not sufficient to tackle the scale of the problem. Am I right?
Howard Kunreuther:I'm not quite sure that I would agree with that. And I'll tell you why I don't. I mean, I'll let's take the example that we're really talking about right now on how we can get political leaders to pay attention to climate change. If it turns out there was enough force from individuals from all of us to say, this is something we have to pay attention to, because of all of what might happen, which is really, frankly, why you and I are talking about this issue today. Because I think it's these biases and heuristics that prevent us from doing these things. But if we got people to recognize worst case scenarios, if we got people to recognize that the benefits can be short term, and we actually had these, all of us saying to our political leaders, that cannot be done without your assistance, we have to help low income people in a way who can do these things. So we have an equity and affordability problem and a fairness problem in terms of how we're going to do this, we can't really do this unless we have some laws and regulations that are going to be actually imposed, we can do it if we don't have fine since taxes that are going to tax some fossil fuels in a way that would actually make this harder for them to actually compete with our energy efficiency. If those are things that we feel are really going to be necessary. You cannot do that with the individuals alone. You need a public private partnership. And a public private partnership means that industry can do these things. But the public sector has to do it. And we cannot get the public sector to do it. Unless we have enough citizens and residents in the world who are going to vote and support these kinds of issues. We don't have that today. The money has come and the energy has come by supporting our our industry. But we haven't had the way to deal with it in the context of individuals. This is a first step that I'm suggesting here that we move towards solar and make it attractive and move towards other attack other other energy efficient things so that the public can see that this is something they want to do because we don't have the public seeing it. The winners of this is winners and then we're all going to be losing all the other big businesses and industry that are able to actually continue the kinds of things that we currently are having and we have got to get individuals to pay attention, we haven't done that yet. And that's why I think we're talking we have to get to that level, that doesn't mean that we don't have firms playing a role, they are critical to play a role. And many of them are concerned about these issues. It isn't that they don't want to see these changes, but they also have their own incentives. And there are certain industries that have particular incentives to pervert preserve the status quo. And you have to figure out how to deal with that problem by getting people to want to change.
David Wright:So we're, I think that I'm quite I'm of two minds about this. So I 1%. So I'm pleased with this conversation, because I think we're talking about exactly the thing that needs to be discussed, which is this is a political decision, right? This is a political process of us collectively coming to an understanding about how we should deal with this risk and all risks, really. And one of the things that it reading Mary Douglas, at least, that I kind of realized for the first time, which was that all risk conversations or political conversations. And I never thought about I've been in the insurance industry my whole career, it never occurred to me that that was the case. It seemed to me that that the insurance industry kind of lived in a world and every industry has lobbyists and has regulation, but the the intimate link between risk and politics was not something that had occurred to me. And so on that sense, at least we're having this conversation other hand, man, do we really have to go through the political like, Is that the best decision making process we have for this? Like, it seems to me to be one way very hard to do anything at all in?
Howard Kunreuther:I agree with you on what you just said. But I would also say to you, Doug, that this is a question that has to come to the individual feeling this is the right thing to do. Right? I'm not suggesting that we have to go through the political, I'm suggesting quite the opposite, that if we don't get the individuals and humans, human beings who have a whole set of these biases and not eat, I have used the terms that Cass Sunstein and and Dick Thaler have used econs in humans, econs will behave very rationally and whatnot, we have our own challenges in terms of rationality, so that politicians are in the category of humans, if we cannot get the humans to recognize these biases are impeding us, but also to come up with solutions to address these biases. If you tell them, you have these biases, and people say, Well, that's the way I behave. And I agree with that, that is the way I behave, I bought my first set of battery cables only after my car did not start for me, I paid a large amount for the towing charge, because I thought that would never happen to me. And then only then did I buy them. So I behave in exactly that way. Which is one reason I'm studying this because I recognize at the age of 19, or 20, or 21, I behaved in a way that was really, really wasn't appropriate from an economic point of view. But if we cannot get individuals to see the advantages of doing these things, with what is currently available, we're not going to be successful, we are currently able to do a set of things that are more not only more efficient, but are cheaper for people to do, and they're not doing them. And that's why I'm focusing on solar as an example, or even energy. And if you put in the long term impacts every single person in the world if they could do it, if they could afford it, because that's the one of the issues why you need the government and your long term loans may not make make sense for an a very low income individual, but you want them to do the same things, they would do it, if you could say to them, Look, this isn't just for yourself, and other people around the world today. It's for your children and your grandchildren and future generations. And if you can get that message across to people, and get it in a way that they will pay attention. I have four children and four grandchildren and everything we're talking about. And the reason I'm spending my time on the climate change problem is it is the most important thing I could do in my life right now, because of the fact that I'm concerned with what kind of a world are they going to live in?
David Wright:So I still find the political project depressing, because I'm, maybe you can help me. Are there examples of instances in history where we have been able to steer the ship and miss the iceberg, right, where there's risks that hadn't happened yet. So we don't have availability bias to to help us. But we've avoided them. I mean, it's kind of hard to say, you know, what dogs didn't bark, but, you know, Can you are you studied any instances of success in the past that can give us hope that we can do this because we have not yet experienced drastic climate change, which has impacted our environment. And so, you know, absent that, how do you you know, have we ever been able to build a political consensus to avoid risks?
Howard Kunreuther:I think it's a It's a wonderful question. And I don't have a good answer, I have not found anything that comes to mind. Because of our behavioral biases. There's a tendency not to want to think about a plague this dependency not to want to think about a pandemic, there's a tendency not to want to think about a war. And there's a tendency not to want to think about this in the context of what we don't want to think about, particularly if we personalize that. And so that if people are not involved in it, they're not living in, in areas that we're talking about right now, with Russia and the impacts that it's having, they're going to say, well, it's not my problem, I don't have to deal with it. And that's a major, major challenge. If we feel we're not threatened, we're going to do everything we can not to do the things that we feel wish that should be done, if we put on the table, what impacts is going to have on others. And I think we're now in a world where at least we're thinking about pandemics. And we're thinking about the kind of crisis we're having in other parts of the world in a way that we are paying attention to it because we're asking, What kind of a world do we want to live in? Do we want to live in a democratic world and we want to live in something that has a certain kind of behavior that really is incompatible with what our values on our ideas are? And what kind of a world do we want to live in? And that is now raising this question on an issue we're not going to be talking about today, because we could spend a few hours talking about that, but it's the same quite a question that you're raising, we tend not to want to think about things that don't impact us personally. And if we think of, and, as a result, we tend to maintain the status quo. And we have a lot of pressure from other sources to keep the status quo as it is, for economic reasons. And when you have that combination, it's steadily
David Wright:so there. And yet, there is a little bit of a reason for hope, I want to come back to history. But I want to sort of stop off quickly in this concept of what voters actually do. And I guest on this podcast called Brian Kaplan, who has a book called The myth of the rational voter. And his point is that people don't vote rationally in the sense of they don't always or maybe ever vote for things that benefit themselves personally, there's lots of folks who will vote for higher taxes if those taxes are put to use to help the poor or something, right. So what's amazing is that the richest parts of our country tend to want to have very progressive tax systems. And there's a there's an interesting puzzle there where we are very happy to buy into a vision and actually hurt ourselves in an economic sense in support of that vision. And so there's a there's an opening here, there's a door is open there for us to do something that isn't immediately self serving, right, it seems that voters so goes, this literature that I've read a little bit of voters aren't necessarily rational. In this case, rationality is kind of a problem. Because rationality, I think, is about doing things that are immediately beneficial to you. So I feel like there's an opening. But I do wonder about whether we can get through that while while promoting an agenda that we can get everybody on board with. And maybe what one way of reading what you're saying, and your work is that we've actually learned some things, right. So the social sciences advanced to a point where we understand where your books teach us how we can overcome these things. And the reason why we don't have historical episodes of success for this is that we just know those things. Right. So Cass Sunstein, Richard Thaler, Kahneman Tversky, you know, they didn't they weren't alive 100 years ago, they they've done their work in the last 50 years. And those things have advanced our technology or social technology for for doing things. Is that is that the hope?
Howard Kunreuther:That's the hope, I think the hope is what you're saying that somehow we have learned from our experiences in the past, in order to be able to try to do a better job in the future. And the work that I'm doing right now, since I'll make it a little more personal is exactly in that spirit. I'm not sure that I would be doing this particular work on climate change, had it not been for COVID-19 and the pandemic, that got me to think about the fact that we were doing such a pure poor job of doing that, and two months after the pandemics. Well, in March of 2020, Paul Slovic, and I wrote a piece in Politico on exactly the fact that why COVID-19 gives us lessons for climate change. And that's what really got me started thinking is my discussions with Paul, when we did this, and writing this piece, to say maybe there's something we can learn from how we did so poorly with the pandemic. And as a result can make sure we don't make the same mistakes about climate change. And that really is what got me started in terms of writing this particular doing this and then working with some students on how we could get people to adopt solar energy. And then realizing that if we don't do that now we're in real, real trouble.
David Wright:Yeah, I had another guest recent guests, and this podcast is General Stanley McChrystal, retired four star general. And I talked to him about social progress and military in the military. And he didn't paint a pretty picture were more or less he, he's a pessimist on social progress. And the evidence that we discussed, there was really how the patterns of conflict insurgency really have been the same for all of human history. And it's actually the same story that plays out again, and again, and again, all throughout history. And it's the same tactics you that the that the insurgents might undertake. And it's the same tactics that the defenders or or oppressors or however you want to define it undertake, and they kind of play out. And they all learn the same lessons every generation or two, when these things happen in various countries around the world. And it just sort of they don't learn, even though there's history to study, they don't seem to be able to learn how to actually prevent or win these conflicts, which is super depressing. Now, I I think I say that to make a couple points. Well, one of which is that the the stakes are really high. And the the, the magnitude of the challenge is immense is doing something that's ever been done, I think is what we're talking about here. And I'd also say that it is not just about climate change, although that's, you know, that's certainly maybe the best example of it, this, this this problem exists, no matter what your priority is, I
Howard Kunreuther:think you're right. I think you're right, I think the only reason we're talking about climate change is because it's looming, as something we really better pay attention to now. So I put it highest on the agenda. Because if we don't do something in the next 20 or 30 years, we were in major, major trouble for many generations, we don't know what will happen. And so, so racking things from that vantage point is really important. But at the same time, I think you're absolutely right, that we we face this problem with almost anything that is negative, where we don't want to think about it. And we can try to figure out how we can lead our normal life without worrying and people live in hurricane prone areas. And they are saying this is a great area to live in, they do not want to think about what the consequences are of of having a hurricane, they want to think about all the wonderful things they have. And to some extent they're right, because it's a low probability event. But the fact is, if you have lots of people doing these things now, and then something does happen. It the costs are enormous. And that's where all of this is coming.
David Wright:And one of the things that I one of the points you made that I really like is is about how local communities can anchor some of these things. Right. So you know, it's the bottom up process of simultaneous realization amongst many, many groups of people that this is the way this is this is an important priority, as opposed to, you know, it seems to me that at the highest levels of abstraction and national politics, let's say or supranational politics on the world level, you know, it doesn't seem to be especially top down really works, except that the point of a gun? Right, you know, they're more responsive than they are generative of the of the, you know, I can't tell you, I can't imagine an article that that is anything other than, you know, talking about failures of leadership, at national level, everybody seems to be complaining about it. And there's some of the very few instances where we have the ability for or kind of a world global scale leaders to really move public opinion is that
Howard Kunreuther:well, I think we have a global scale leader who has moved public opinion in the Ukraine. Okay. Yeah, sure. I think in the Ukraine, that our the leadership there has actually moved all of us to think about the world in a different way than we otherwise might have. So I think it can happen, it can happen for good and it can happen for bet for negative, as we know, you can move people to move in another direction. So I do think I do think that is one of the real issues that you're raising here, as we're as we're talking, and that is, how do we get our leaders to see this as being sufficiently important to to put their energy and time into making some changes that otherwise might not happen?
David Wright:So we're out of time, so close on, just maybe if you could tell us where they can people can find your work, Howard, we know what you're working on next. Something you can promote, which we watch out for?
Howard Kunreuther:Well, I think what I would promote is the most important, the notion of all of us trying to reflect on the issue of how climate change is going to play a role. I have written a number of thing of books and others that highlight that the one that comes closest frankly to what I've been doing is with my colleague Bob Mont Robert Meyer, the Ostrich Paradox why we under prepare for disasters, and I wouldn't have been too Talking about any of these issues, if it wasn't for the fact that the two of us concluded that we are not going to change these biases, but we're going to have to figure out how we develop a behavioral risk audit in order to address that. And the reason I'm mentioning that particular book, it's a very short book. And actually, it's a popular book, I thank Bob buyer for putting a number of these excellent examples, but the two of us work together for five years on it. And I would say that everything that I'm going to be writing about in a book that I hope I can finish on how we can reduce losses from climate change, would be building on the notions that we have to accept these biases and heuristics, which we talk about in this book. And we have to recognize how we can deal with them. But we cannot deal with them without having and this is the contribution that I would want to make on this, but others of making it as well. And one of a number of people are thinking about this. And that is you have to have longer term strategies, you have to have economic incentives, you have to have taxes, you have to have building codes and other regulations to deal with this. And you have to tie that in with the notion that people are going to feel that they're going to benefit in the short term. And that's what I hope to be doing in this book that I'm finishing. The Ostrich Paradox is a good example of something I would be interested in having people know why we under prepare for disasters, and then how do we think about a behavioral risk audit in order to be able to overcome that?
David Wright:My guest today is Howard Kunreuther. Howard, thank you very much.
Howard Kunreuther:Thank you