Risk Management: We're (Collectively) Doing It Wrong

[MikeDoyle]

(No, NOT us on this board - this is more directed towards the population at large)

Ran across this article on one of the blogs I read. It's a write-up of The Wharton School's Risk Management and Decision Processes Centerthat discusses why people don't prep, and their efforts to get people to change their behavior.

The thrust of the article is that we tend to rationalize our way into irrational decisions about our exposure to hazards. An obvious example would be the number of people who live in Tornado Alley who don't have a basement set up for shelter, and don't take other measures to provide themselves with shelter. Why? "Well, yeah, it's a significant risk over the long term, but... Ya know, this town hasn't been hit for forty years, and the chances that it's gonna happen this spring are rilly low, and I rilly need to get that swimming pool paid off..." Other examples abound (see the article's discussion of the Quake simulation game, for instance).

Now, when John and Jane Q. Citizen make this mistake, it's a problem. When it's a corporate or government executive making this mistake, it goes way beyond what you could describe as a "problem" (the example the article cites is Haiti). Not that I'm pointing fingers, mind you - people rationalize away risks, and in retrospect, wish they hadn't done that. I'm a "people", and it took a lot of bitter experience for me to start learning lessons instead of letting myself get thumped over and over again - and I'm still learning.

There's a difference between understanding intellectually that you can get thumped by Reality at any moment, and knowing bone-deep that you can and will get thumped by Reality. The issue Wharton's addressing is how to fix this tendency to rationalize away Reality before it thumps you. IMHO, this is a Good Thing...

Well, enough of my rambling. What do you folks think about it?

[raptor]

It is an interesting article. That does require some thought.

People are funny critters. We all know (or should know) that we are all going to die someday. Yet we seem to be able to deal with this fact...because we do not think we are going to die in the next few minutes. Our death will occur at some undefined point in the future. The ability to defer this fact is IMO what is the reason people for the results in the article's game quake.

In the case of uncertain events/very long range disasters like for instance the eruption of yellow stone volcano we can rationalize the low probability and simply say to ourselves it is not worth to prep for it. Everyone has limited resources and it makes sense to allocate our scarce resources to deal with more likely events. For instance I would argue that it is foolish to spend your child's college money on a BOL so you can survive the Yellow Stone eruption. There is a damn good chance that your family would be better off with a college educated child than with a Yellow Stone Proof BOL.

However for high probability random events (i.e. tornados, hurricanes, earthquakes or floods) that logic does not apply. However, other reasons do apply. IMO denial is certainly a strong force as is risk taking. Some people simply cannot deal with the stress of these events and like their eventual demise, they suppress these thoughts and fears.

[TacAir]

A professional business continuity manager might take a different view.

You have limited/scarce funds to analyze hazards, perform risk assessment and put in prevention and/or mitigation features. Any "left over" funds tend to go to response/recovery/restoration resources.

If it only happens "every 40 years" you make the decision that the risk is low enough - you will spend scarce funds to cover a higher level risk.

As for regular folks, they may not see the hazard as a high-level risk, as opposed to having a new plasma TV.

[johndoe]

The choice of resource allocation amongst preppers is something I'd love to see a legitimate study on. I'm constantly amazed at some of the "preppers" I know in real life who have thousands of dollars in guns and ammo stockpiled, but don't own a fire extinguisher.

[TacAir]

The choice of resource allocation amongst preppers is something I'd love to see a legitimate study on. I'm constantly amazed at some of the "preppers" I know in real life who have thousands of dollars in guns and ammo stockpiled, but don't own a fire extinguisher.

Or fire insurance.

[Dust3r]

However for high probability random events (i.e. tornados, hurricanes, earthquakes or floods) that logic does not apply. However, other reasons do apply. IMO denial is certainly a strong force as is risk taking. Some people simply cannot deal with the stress of these events and like their eventual demise, they suppress these thoughts and fears.

And that hit the Bulls-Eye!

Cognitive dissonance is an uncomfortable feeling caused by holding conflicting ideas simultaneously. The theory of cognitive dissonance proposes that people have a motivational drive to reduce dissonance. They do this by changing their attitudes, beliefs, and actions. Dissonance is also reduced by justifying, blaming, and denying. It is one of the most influential and extensively studied theories in social psychology.

Experience can clash with expectations, as, for example, with buyer's remorse following the purchase of an expensive item. In a state of dissonance, people may feel surprise, dread, guilt, anger, or embarrassment. People are biased to think of their choices as correct, despite any contrary evidence. This bias gives dissonance theory its predictive power, shedding light on otherwise puzzling irrational and destructive behavior.

http://en.wikipedia.org/wiki/Cognitive_dissonance

[KnightoftheRoc]

Somewhere here on ZS, a thread was started on this, and a member posted a spreadsheet file that helped do this assessment. So, of course, now that I WANT to refer to it, I can't find the darn thing...

Basically, it lets you plug in the numbers, based on a range of 1-10, I think, of likelihood or danger posed, with 10 being the most likely or dangerous. Adding the numbers up gives you a numerical list of priorities to address, based on your location's individual criteria. It's a pretty simple design, and just about anyone could do the same thing with a pen and pad at the kitchen table. I would then add a section next to each risk, after it's been compiled into a priority list, where you address what preps are needed to deal with it.

I don't even consider "extinction level events" for my prepping. If the sun goes nova, Yellowstone blows half the planet into the next solar system, or Mars comes crashing into the Earth, there's no shelter I can build, or bag I can pack, that will give me a shot at surviving it. And I'm not about to start building my own "space ark" in the backyard to cover these events. I worry more about joblessness, severe weather, earthquake, or civil disturbances. These are things that ARE survivable, if prepared for properly. The government need not collapse, nor society as we know it self-destruct, or even a zombie plague strike, to cause untold havoc in a person's life.

Given that the economic problems of our times are constantly being shoved in our collective faces by the media, I'm surprised that so few people are willing to even explore the idea of preparing for a personal sized disaster, like becoming unemployed. Homelessness could easily follow joblessness, and as bad as it is when you're single, being responsible for a family as well seems, to me, to be all the more reason for getting prepared for problems. Yet, so few actually do, while the means to do so are at their disposal.

I refuse to allow myself to become a Victim of whatever Life throws at me. This is what separates Preppers from Everyone Else. Life may throw me a curveball, and might even beat me down with it, but even beaten, bloodied, and bowed, by resisting, I'm still not a Victim. When I meekly take what Life gives me, no matter how bad, THEN I become a Victim.

[glpowers]

I had an interesting conversation that is related to this earlier today. The guy I was talking to told me about a mutual friend who had purchased an expensive set of skis for deep powder conditions. The salesman suggested a set of inexpensive (five dollar) retention straps, so if a ski came off, it would not be lost in the powder. Our friend declined, and on the last run of the day, had one of his skis come off. After searching by himself for 40 minutes, and then having the help from a ski patroller for another 20 minutes, the ski was found and he made it down. The other story was about a mutual acquaintance who was skiing in the backcountry in Oregon. He had declined to purchase a twelve dollar permit that would cover search and rescue costs if an emergency were to occur. This guy is an avid outdoorsman who regularly participates in adventure races. Sure enough, he hit a tree, had to be evacuated by helicopter, and will have to pay between $6,000.00 and $8,000.00 for that flight.

Both of these guys are experienced at the activities they were participating in and didn't think anything bad would happen on the day it did. People who don't prep don't think anything that would necessitate the use of preps will happen, so why waste the money? I sincerely hope they are right, but I plan for if they are wrong.

[SteveD]

I look at it this way..
Within two weeks I'll be piking up a small gas powered water pump. It's main use will be for transferring Maple sap between bulk tanks. But it could be handy for Pumping water from the creek for irrigation or use in the house. The more things that have more than one use the better .

[AnonEmous]

Risk management is a difficult and complicated issue: after Y2K, some executives asked why they spent millions on upgrades, tests, and back ups when eventually nothing happened. Stupified, IT people in response were left telling the executives that the "upgrades, checks, and back ups" were the reason (in part) nothing happened. If you prepare to avoid a situation successfully, and the situation does not happen, then people see the measures as unnecessary. Of course, most of the measures discussed here (taking reasonable precautions and creating basic plans BEFORE they are needed) do not prevent natural disasters, so the comparison is imperfect.

Unfortunately, the lack of clear appreciation for risk management (myself included to some extent) is an individual and institutional trait. It is the reason there is a run on the grocery store before a snow storm and, financially speaking, it is why major companies suffer large, short-run downturns under temporarily bad circumstances (BP last summer, the DOW 30 in late 2008 through March 2009).

In some ways it represents a lack of imagination: when things are good, it is difficult to think they can go poorly; when things are down, it can be difficult to be optimistic. A balance is as necessary as it can be challenging.

[FyreWitch]

Yes!!! These are the issues that make me really wonder if anyone has any common sense at all. I live in New England and wonder every winter how people can live here and not even have snow tires! Why are they all running to the store when the weather report calls for snow? Snow ill inevitably happen here, why be unprepared?

I grew up here and in a rural area of southern Florida. I was a teenager during the Blizzard of 1978. That was the only time I have ever seen the stores empty of necessities and more not able to get through. I keep wondering what everybody does with all those gallons of fresh milk when the snow is past. When I was growing up we always had supplies on hand. Both in Mass and Fla, we lived in very out of the way places. We EXPECTED to be left without power for extended periods of time. Our house in Mass always had 2 (275 gal) tanks of oil, 5 cords of wood indoors, 300 gallons of kerosene, plenty of frozen food, dried food and canned food. We always had a vegetable garden. There was land and water for hunting and fishing as well as equipment to do it. We were all taught as children how to fish, hunt, dress game and cook simple things. I thought everyone had that kind of preparation and that unless your house was actually destroyed, there would be no need of outside help. As an adult, I've always been prepared for such crises as might come - mainly snowstorms and power outages where I am. My adult kids know how to deal with what life may throw at them. I fail to understand how anyone could not have plans and preparation for at least a few days without normal amenities. But, they do just go on obliviously unprepared.

We lost power a few years ago the day before Thanksgiving for 3 days. My kids had guests who were amazed that we still had a complete turkey dinner by candlelight and kerosene light. Needless to say, my kids just took it as normal.

I am trying now to prepare for long-term disaster or a PAW. I feel that the world is headed towards something that could cause massive social-political-economic collapse or worse. True extinction level events, I can do nothing about. It is those things that are longer than 2 weeks and less than extinction level that I want to prepare better for.

[jackal556]

This is a great topic and has the little grey cells working.

If you look at a basic risk management matrix of risk versus frequency, you get a classic "four square" diagram with high risk- low risk and high frequency- low frequency events. Low impact- low frequency events are something that we can forget. They don't happen often, but when they do, they don't damage much. For instance, earthquakes in my area. Low impact- high frequency events, again are things that we can handle. We see them often enough and when they happen, again, not much damage. High impact- high frequency events; now we're talking. These occur often and do a lot of damage. Maybe throw severe storms in this stack. The area we're going to have problems with is the low frequency- high impact events. Think of the northeastern blackout of 2003 for instance. These are the events really to prepare for, and with that level of preparation an ability to adapt.

A lot of this might also be a matter of perspective.

[connecticut_yankee]

Players are told at the start of the game that at any time, an earthquake can hit, either severe or mild, and that three to five quakes will hit during the course of the game.

This part of the article really kills the conclusions for me.

Generally speaking people do not behave that way (the way in the article) IRL. When there is actually value to be gained or lost people take steps to protect them. Studying the psychology of gamers playing MMOs yields more valuable information (Diablo II / Ultima Online, anyone?). This experiment only really seems to indicate that the players did not treat the game as RL (i.e. they did not actually put a high value on their virtual property) and instead were running strategies to obtain the most virtual money because of some mental money = score translation.

Another point which the article conveniently leaves out is that you do not start with enough money to purchase all available house upgrades. You start with $20k and this is a screenshot of the game:




Three final points:
1) People will try to protect their assets within their financial means (simply stated in the article itself without fancy numbers).
2) This experiment needs to be run with a cash reward at the end taking into account property value and cash left.
3) The optimal strategy is not just building your house as quickly as possible - it's about doing it as low risk as possible. Given that all the player knows is that a quake will strike eventually, the optimal strategy in terms of minimal risk is likely to be to invest all your capital until you are able to purchase all upgrades at once (the game is continuous, and there are potential discrete pieces where you could purchase piecemeal, but the gist is the same). This also depends on the value of your property and how much damage the upgrades prevent in terms of cost purchased versus potential cost saved.

[DarkAxel]

The choice of resource allocation amongst preppers is something I'd love to see a legitimate study on. I'm constantly amazed at some of the "preppers" I know in real life who have thousands of dollars in guns and ammo stockpiled, but don't own a fire extinguisher.

I've said it before, and it bears repeating: The kind of person who does this isn't a prepper. They are a gun collector. They just use prepping to rationalize their gun purchases, instead of being honest with themselves about their motivations (buying a gun to add to your collection is just as reasonable as buying a gun for self-defense).

I read the article, and one of the points I found interesting is that they said almost everyone started out by spending their cash to make their house stronger. This tells me that the folks playing this simulation thought about the disaster, and did lay in some structural preps, but the level of preparation fell off as time went by. This tells me that at some point, the players decided they had prepped enough, and decided to sit on the rest of their cash.

Something NOT mentioned in the article was whether or not $20,000 was enough to make their virtual homes "quake-proof". Some of the players might have tried to lay in some initial preps, then sat on their money to earn interest that they could apply to more preps later. If $20,000 WAS enough, they might not have realized that, and sat on their money in hopes of building the ULTIMATE quake-proof house. I wonder if the researchers considered that in their study.

I also wonder if the researchers included sociological variables in their study. Thanks to our modern society's access to instant communication and expectation of instant gratification, I believe there is a lot of folks out there who, if they don't see instant results from their efforts, decide that those efforts are worthless. The urge to splurge and not save and put back, IMHO, is a relatively new phenomenon.

Our ancestors knew the wisdom of laying in stores of food, water, and means of personal and community protection. For them, if they didn't prep, they didn't survive the winter, the siege, or bandit attack. History bears this out; If our ancestors didn't learn to prep, we wouldn't be here today. I wonder if the researchers would have gotten the same results if, instead of a quake simulation, they used a famine simulation, or a drought simulation.

IMHO, if something can happen, it will happen. And people better damn well think about it.