What Have The Past 30 Years Taught Us About Managing Risk? by Knowledge@Wharton
How Managing Risk Has Changed
The problem with many catastrophic risks isn’t just that their impacts, when they hit, are so massive. It’s also that their odds of occurring in any given short time frame are very small, so that planning for them has to be handled as a long-term priority while the proverbial sun is shining. And neither companies nor individuals are particularly apt at taking serious, long-term action to prepare for low probability, high consequence events.
Enter the Wharton Risk Management and Decision Processes Center, which was created 30 years ago to help individuals, businesses, governments and global organizations to be better prepared for those longer range, more unpredictable dangers.
Knowledge@Wharton spoke with Howard Kunreuther and Robert Meyer, co-directors of the Wharton Risk Management and Decision Processes Center, and executive director Erwann Michel-Kerjan about the center’s research and how managing risk has changed over the past few decades.
An edited transcript of the conversation appears below.
Knowledge@Wharton: Howard, what led to the starting of the Risk Center 30 years ago?
Howard Kunreuther: Well, it’s interesting that our center has always focused on low probability, high consequence events, [because] it was a low probability, high consequence event that actually got the center started. I was in the office of the CEO of Rohm and Haas with my colleague Ned Bowman [of Wharton]. We were looking at the challenges that the company was facing in dealing with environmental risks, and when we arrived there, we were told that there had been a large chemical accident in Bhopal that the company was very concerned about. It involved Union Carbide, but every chemical company was involved. And that really was the start of the center, because we worked very closely with Rohm and Haas and Cigna to begin to look at issues like chemical accidents as a way of trying to figure out how we would deal with extreme events.
Knowledge@Wharton: Thinking about the catastrophic risks that businesses faced 30 years ago, what were some of the most important risks in addition to manufacturing accidents like Bhopal that you were concerned about?
Kunreuther: It was really the chemical accidents that got us started, and I think technological accidents were clearly a very important part of how businesses had to think. They weren’t thinking as much about it as we would have liked them to. They were saying it wasn’t going to happen to me. But that was certainly on the agenda, and any time there was an accident like a Bhopal, they then paid attention to it. The other area we focused on — and that had been the focus of a lot of the research a number of us had been doing, including my late colleague, Paul Kleindorfer, who was co-director of the center when we formed it — was natural hazard risks and natural disasters. And those were risks that were not predictable, but if there was a severe hurricane or flood or earthquake, that might have an impact in terms of how the firms had to react.
“When you talk to companies or individuals and ask what risks they are most concerned about, typically, they are the things that just happened yesterday. People tend to focus on the disaster that just happened.” –Robert Meyer
Knowledge@Wharton: What were some of the research projects that you took on to look into these risks?
Kunreuther: Well, because of our start with the chemical industry, we had a very large project with the Environmental Protection Agency on chemical accidents — how one dealt with them — and technological accidents, so we were certainly working on that. We were also working on the natural hazards area and why individuals were not protecting themselves and purchasing insurance. That was something that both Paul and I had been focusing on with others over a period of time.
The other area that emerged was the siting of the high-level radioactive waste facility at Yucca Mountain in Nevada. There was a whole project that was formed, and for 10 years, there was a group of us who were working together. It was very much an interdisciplinary group. Paul Slovic, president of Decision Research, was a part of that. Roger Kasperson, a geographer, a psychologist, and then there were anthropologists — we were all working with the state of Nevada to try to figure out how to site this facility, and so the center played a role in that. We had been looking at siting a liquefied natural gas facility before the center had been formed.
Knowledge@Wharton: What would you say were some of the key findings of your earliest research projects?
Kunreuther: The key findings are findings we may want to talk about even today. Really, what was happening was that it wasn’t until a disaster occurred that there was really a lot of attention paid. There was a tendency to say, “This is not going to happen to me,” and firms were behaving that way. Certainly, consumers and homeowners were behaving that way. As a result, we as a center were trying to figure out the important things to think about beforehand, and what kinds of programs and policies could be put forward to try to deal with them so we didn’t have to be in a reactive mode after a disaster occurred.
Knowledge@Wharton: If all of you were to look back over the past 30 years, how would you say the nature of risk has evolved and changed? Bob, would you like to start us off?
Robert Meyer: The risks have always been there. To build on what Howard was saying, one of the things we’ve observed as a center is that often, when you talk to companies or individuals and ask what risks they’re most concerned about, typically, they are the things that just happened yesterday. People tend to focus on the disaster that just happened, so one of the things we try to do as a center is get people and organizations to focus not only on the event that just happened, but also to refocus on unseen risks.
Just to give you an example, we work with the World Economic Forum, and every year, they come out with a survey of about 900 academics and ask them what are the risks that they are most concerned about. Typically, what you find is an awful lot of year-to-year variability in what is hitting the radar screen. For example, last year, the No. 1 thing that came up was state unrest, particularly in Europe. If you think about it, that makes sense, because one of the big news items in Europe last year was unrest in the Ukraine and so forth. But what’s interesting is a risk that was very important two or three years ago: cyberterrorism. In some sense, one of our challenges as a center is to get people and organizations to think about not just the thing that happened most recently, but to take a good long-term view of what are real risks. Often, the things you have to worry about are the things that you’re not currently thinking about.
Knowledge@Wharton: Erwann, what do you think?
Erwann Michel-Kerjan: …The