Risk Analysis for Extreme Events: Economic Incentives for Reducing Future Losses.
Risk Analysis for Extreme Events: Economic Incentives
for Reducing Future Losses.
(510 K)
Kunreuther, H.; Meyer, R.; VandenBulte, C.
NIST GCR 04-871; 99 p. October 2004.
Sponsor:
National Institute of Standards and Technology,
Gaithersburg, MD
Keywords:
economic incentives; extreme events; interdependency;
interdependent security; laboratory experiments; risk
analysis; risk management; risk assessment
Abstract:
This report discusses the need for linking risk
assessment, risk perception, and risk management in
order to develop meaningful strategies for dealing with
extreme events, i.e., low probability-high consequence
events. We give special attention to economic incentives
and to extreme events exhibiting interdependencies,
either among individual stakeholders or among
stakeholder groups. We also give special attention to
the need for cooperation between the public and private
sectors with the ultimate goal of generating sound
strategies for reducing the risks of extreme events and
reducing the damage should such catastrophes occur. We
present a conceptual framework of how risk assessment,
risk perception and risk management are linked with each
other. Risk assessment evaluates the likelihood and
consequences of prospective risks. Risk perception is
concerned with the psychological and emotional aspects
of risks. Risk management involves developing strategies
for reducing the likelihood and/or consequences of
extreme events. The discussion of risk assessment
describes how the exceedance probability or EP curve is
a convenient way of summarizing the nature of the risk
and provides valuable input for different stakeholders
to develop strategies for managing risk. The discussion
of risk perception discusses how individual decisions on
whether or not to adopt protective measures are
influenced by psychological and emotional factors.
Problems of coordination when facing interdependent
security risks are also analyzed. In particular, we
discuss the need for risk management strategies that
involve both the private and public sectors for dealing
with the negative externalities created by these
interdependencies. The discussion of risk management
strategies focuses on insurance and mitigation as two
complementary strategies for reducing future losses and
providing funds for recovery, and addresses the
role of public-private partnerships in this regard. The
use of controlled laboratory experiments to better
understand household adaptive response to natural
hazards is illustrated through an earthquake simulation
that was tested with University of Pennsylvania
undergraduate and graduate students.
