Dealing with Low Probability-High Consequence Events: A Behavioral Economics of Risk Presentation

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What are the odds that a tsunami hit the coast of a South Asian country? What are the chances that a mudslide fall on a village in Nicaragua this year? These are the types of questions that risk behavior specialists study every day. In the lecture Dealing with Low Probability-High Consequence Events: A Behavioral Economics of Risk Presentation, World Bank Senior Vice President and Chief Economist Justin Lin introduces Senior Scholar at the Woodrow Wilson School of Public and International Affairs of Princeton University, Daniel Kahneman and Professor of Decision Sciences and Public Policy of the Wharton School, Howard Kunreuther to discuss human behavioral patterns in undertaking mitigation strategies to assess these types of risks . They discussed the role of behavioral economics, using a real-time experiment on the findings of the behavioral economics of risk as applied to natural disasters. The event was moderated by Apurva Sanghi, Senior Economist of the Global Facility for Disaster Reduction and Recovery of the World Bank.

The seminar began when audience members participated in a real-time experiment when they responded to a series of questions dealing with insuring their homes in the event of a natural disaster. Kahneman, Senior Scholar at the Woodrow Wilson School of Public and International Affairs at Princeton University then led the discussion about the psychological impacts on probability theories, describing both the Rational Choice Theory and the Assumption of Utility Theory. Kahneman highlighted how economics relies on the twin assumptions of rationality and self-interest in decision-making. These studies founded the concept of behavioral economics, which focus on the psychological basis for decision-making trends. The field has several applications towards studying risk and several sub-fields of development such as natural disasters and climate change.

To provide an indepth understanding of Kahneman’s assessment, Kunreuther discussed the importance of studying probability and risk in insurance in natural disasters. He spoke of the importance of studying probability, mentioning it can help researchers reach prescriptivist grounds to influence governments in policy-making. He offered three guiding principles in dealing with the process, citing the need for risk-assessment, understanding behavioral biases towards risk, and investing in mitigation towards the understatement of risk.

The seminar concluded with a Question and Answer session. Audience members asked about the role of climate change in risk-prevention measures, along with how to frame decisions in order to give policy-makers boundaries of thought.

Click Here To Watch The Presentation On Low Probability High Consequence Events

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03. March 2009 by Miguel Barbosa
Categories: Curated Readings, Risk & Uncertainty | Leave a comment

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