Why we fail to prepare for disasters

Tim Harford (The Undercover Economist) offers a short and readable account here of some of the reasons why, faced with clear risks, we still fail to act. We can see the problem, typically one of many, but don’t do enough to manage or mitigate the risk. New Orleans’ experiences with severe weather events features prominently as does (not surprisingly) COVID 19.

This, then, is why you and I did not see this coming: we couldn’t grasp the scale of the threat; we took complacent cues from each other, rather than digesting the logic of the reports from China and Italy; we retained a sunny optimism that no matter how bad things got, we personally would escape harm; we could not grasp what an exponentially growing epidemic really means; and our wishful thinking pushed us to look for reasons to ignore the danger.

Why we fail to prepare for disasters; Tim Harford (The Undercover Economist)

Another big part of the problem is that the cost of being fully prepared can be more than we are willing to pay. Especially when there is continuous pressure to find cost economies in the here and now

Serious scenarios are useful, but … no use if they are not taken seriously. That means spending money on research that may never pay off, or on emergency capacity that may never be used. It is not easy to justify such investments with the day-to-day logic of efficiency.

So the key points I took from his post:

  • Sometimes it can be something genuinely new and unexpected (i.e. Black Swan events) but risks we are well aware of can be equally damaging
  • Part of the problem is that we are social animals and take our cues from what the rest of the herd is doing (“normalcy bias” or “negative panic”)
  • Even where we understand the statistics and know that someone will be impacted, we tend to assume it will be someone else or someone else’s family (“optimism bias”)
  • We are especially bad at understanding risks that have an exponential driver (“exponential myopia”)
  • We are also quite good at finding reasons to justify ignoring risks we want to ignore or otherwise find inconvenient (“wishful thinking”)
  • Last, but far from least, efficiency is the enemy of resilience.

We need to remember that most of the factors listed above can also be useful in many other contexts (arguably most of the time). A tendency not to panic can be pretty useful and optimism has helped dreamers and ordinary people achieve many great things that have benefited the herd. Efficiency as a rule seems like a good thing to strive for.

Harford does not offer any easy answers but his post touches on issues that I have also been considering in Kay and King’s book titled “Radical Uncertainty: Decision-Making for an Unknowable Future”. I have done a couple of posts on that book already (here and here) and am working on a final one that focuses on Chapters 8-16 which set out their ideas for how we navigate a world prone to radical uncertainty.

Tony – From the Outside

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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