Kevin Hayden – TruthisTreason.net
Source: Wharton Magazine - Originally posted June 11, 2010
Masters of Disaster
Howard Kunreuther and Robert Meyer have staked their careers on the belief that human beings are at heart, irrational and doomed to repeat the same mistakes over and over—unless we find a way to overcome our wiring.
But even they have been surprised by the results of Quake. (Hayden’s Note: No, not the First Person Shooter game called ‘Quake’ … I thought they meant that, too!)
Quake is a computer simulation that Meyer, the Gayfryd Steinberg Professor and co-director with Kunreuther of Wharton’s Risk Management and Decision Processes Center, helped design to test certain ideas about how humans perceive “risk.” Quake is very easy to play, but, as it turns out, very difficult to win—though not because the mechanics of the game are all that tricky.
Rather, it’s our brains that make it difficult.
It works like this: Quake players are presented with a little icon of a house on a map of a hypothetical country. They also get a pot of digital cash—$20,000. 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. Then all the players have to do, it turns out, is decide what to do with their money: they can pump it into their homes, making them safer by purchasing a series of structural upgrades (to the chimney, the door frame, the roof, etc.) or they can leave it in the bank and earn 10 percent interest. The game unfolds in real time, and up to 10 people can inhabit the same Quake world at one time. Players can see other people’s houses and observe their decisions.
Kunreuther, the Cecilia Yen Koo Professor, and Meyer have run the Quake simulation for the past four years, using students in Kunreuther’s Risk Analysis and Environmental Management class as the guinea pigs/gamers. By now, about 500 students have played the game, and every time, they play it essentially the same way.
They tend to begin the game cautiously, spending money to build stronger roofs and walls. But as the game goes on, they take more risks. Instead of spending their money to avoid disaster and death, they keep it in the bank to earn interest.
“They think, ‘Can I get away with the next 30 seconds in the game?’” says Meyer. “‘What are the odds of getting destroyed in the next 30 seconds? Well, probably very little.’ So they think, ‘OK, I’ll go a minute.’ And of course eventually they get destroyed.”
Meyer and Kunreuther have found that there’s nothing they can do to prevent the students from destroying themselves. Even if one of them pulls a student aside and explicitly tells her how to “win” the game—i.e., by building the strongest house possible, as quickly as possible, and then just sitting on it—the student still won’t do it, preferring to rack up those sweet interest payments.
It’s not like the students don’t know what’s coming, either. When asked if they understand what’s going on, they always say, yeah, they get it: they’re about to get hit by an earthquake. So if it’s not stupidity or ignorance, why do the students keep losing? Kunreuther and Meyer believe the game demonstrates a psychological bias toward short-term maximization instead of long-term planning—a psychological bias all humans share.
Meyer has tried out the Quake simulation with groups of corporate executives, and the results are the same. The players always see the quake coming, and they always “have a difficult time translating that belief that it’s going to happen to a short-term action”—much the same way, in fact, that the government of Haiti failed to adequately prepare for the possibility of a major earthquake.
The Quake players derive a sense of security from observing the flimsiness of one another’s houses. If everyone around you has a house of straw, having a straw house yourself seems somehow safer.
Of course, this is wrong.
Searching for a ‘Systematic Answer’
When a 7.0-magnitude quake rocked Haiti on January 12, the brittle housing stock of that small island crumbled en masse, and more than 200,000 were killed. The world saw the pictures, the suffering—the people trapped in the rubble, the newly homeless forced to scavenge the ruined streets for food and water—and many felt compelled to get out their credit cards and donate to Haitian relief charities. But for Kunreuther, Meyer and Erwann Michel-Kerjan, who serves as managing director of the Center, the images carried a different sort of resonance. Those images signaled that a clock was now ticking, and an opportunity to transform Haiti in a lasting sense was about to slip away, for reasons similar to the reasons that players of Quake maximize their short-term gains at the expense of long-term fixes: human psychology.
In late January, the world was watching Haiti, but Kunreuther, Meyer and Michel-Kerjan reasoned that pretty soon there’d be another earthquake or tsunami or hurricane someplace else (they were right, as Chile was hit by its own quake in early March); attention would suddenly shift, and nothing would be done to prepare Haiti for future disasters. Just as New Orleans today is not ready for another Katrina. Just as not enough has been done to prevent the next Wall Street collapse (the financial crisis is a good example of the straw-house fallacy, Center leaders say: Those young bankers converting worthless mortgages into AAA-rated securities and selling them to the Global Pool of Money felt better about what they were doing because everyone around them was doing it, too). “Yes, we all feel very bad about all these people, [the] same way we felt bad about the earthquake in China two years ago,” says Michel-Kerjan. “But how do you create a more systematic answer to these issues?”
From the outset, the Center’s mission has focused on how individuals and private and public sector organizations deal with low-probability, high-consequence events—and how the behavior of these key stakeholders can be improved. The idea, says Kunreuther, is to gather key individuals who come at the problems from different perspectives and normally wouldn’t talk to each other—scientists, top elected officials, CEOs—and sit them down at the same table, not only to reach agreement on what the scientists are discovering about, say, global warming, but also to figure out what concrete policy steps make sense, given the science.
In 2005, after Hurricane Katrina resulted in nearly $50 billion in insurance claims, the academics at the Center brought together about 20 of the largest insurance and reinsurance companies in the world to try to figure out how much the next monster hurricane might cost and how the cost might be equitably spread across all the stakeholders—local governments, the federal government, insurance companies and homeowners. The team, which included not just these firms and the Center, but many other organizations, among them the Department of Homeland Security, the World Bank, and experts in catastrophe risk modeling and financial markets, pulled together a first-of-its-kind set of data about hurricane and flood risk in four states—Florida, New York, South Carolina and Texas. Last year, Kunreuther and Michel-Kerjan published with their colleagues an influential analysis of the data in their book, At War With the Weather.
Preparing for What’s Next
Studies have shown that subtle changes in the way humans are presented with information can have significant effects on what choices they make about that information. For example, a country that wants to dramatically boost rates of organ-donation need only change the organ-donation check-off from an “opt-in” choice to an “opt-out” choice. Same with enrollment in 401(k)s. People can be “nudged” in the correct direction, policy-wise, without even knowing it.
These days, Michel-Kerjan is increasingly interested in truly large scale catastrophes and in developing innovative solutions that create value (a topic he teaches in the Wharton MBA program). Looking at the U.S., “I think Katrina may look like a baby in the next few years,” he says. “Do you know what the insured exposure on the coast of Florida is, for example?” By “insured exposure,” he means the total dollar amount of all property that could be obliterated in a hurricane or a flood. “Is it $100 billion? Five hundred billion? What do you think?”
Five hundred billion?
“It’s 2.5 trillion dollars,” he says. “It’s close to $1 trillion for Texas. And it’s $2.4 trillion for the state of New York. From the Texas to Maine coast, you’re talking close to $8 trillion of insured assets on the coast. Just the coast. If you combine that with the potential for more intense hurricanes in the next few years…” He pauses. “That might be very bad. If we don’t mitigate it. If we don’t invest in risk-prediction measures.” Now you are warned.
Ah, but now we’re back to where we started.
Once again, we return to the paradox of Quake, Meyer and Kunreuther’s earthquake simulation, which tells us that we are constantly fighting a losing battle when we try to hedge against catastrophe. And it is not exactly the battle that we think we are fighting, because the very thing that is feeding us data about the battle is a faulty piece of equipment. The war we have to fight is “not a war like the War on Terror, against other people,” Michel-Kerjan says. “It’s mainly a war against ourselves. And that may be harder.”
Jason Fagone is a freelance writer based in Philadelphia. His work has appeared in GQ, Esquire, The Atlantic Monthly and Slate. This is his first piece for Wharton Magazine.
Tiny URL for this post: http://tinyurl.com/3ndlba2