Perception of Risk Posed by Extreme Events
Risk Management
Strategies in an
Uncertain World
Kim B. Staking
Risk Analysis
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Risk Assessment
Risk Management
Politics of Risk
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“Preferences for risk decision alternatives are
associated with differences in the perception of the
relative risk of choice options rather than attitudes
towards risk” (avoid options perceived as riskier)
Nature of Risk
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Scientific/technical/economic approach:
Risk is Objectively quantified (quantifiable)
by risk assessment
Social science approach:
Risk is seen as inherently subjective
(“risk invented to help understand/cope
with dangers and uncertainties of life)
Can these approaches be reconciled?
Risk Perceptions
Psychometric Paradigm
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Quantitative (normative) judgments on
riskiness and desired regulation
Perceived risk is quantifiable and predictable
(orderly and complex)
Factors:
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Dread Risk
Unknown Risk
Number of People exposed (in some studies)
Social Amplification of Risk
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Amplification triggered by occurrence of
adverse event (extreme event)
Adverse impact may extend far beyond direct
damage (litigation, loss of sales, increased
regulation)
Adverse impact may extend beyond
responsible party
Human Processing of Risk
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Evolutionary (instinct)
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Rational
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Similarity and association
Hard-wired
Early warning system
Algorithms and rules
Slow (not hard-wired) – need to learn rules
Two rules work in parallel
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often result in same decision
When systems disagree, evolutionary usually prevails
Rare events tend to over-weighted
Movement towards rationality
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Better information
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Relate to problems at hand
Improve reliability of information
Increase trust in information
Develop associations
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Own experience
Experiences of others
Insurance Implications
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What impact does the price of risk have on perception
or risk?
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How does the insurance industry communicate
knowledge of risk?
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What happens to insurance markets When risk
changes unexpectedly?
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Change in judicial liability
Probability of Terror event
Emerging Market Examples
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Mortgage markets in Colombia and
constitutional court
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Direct impact – Capital Loss
Indirect impact – Higher cost of capital; loss of
investment
Collateral Arrangements in Latin America
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Direct impact – higher risk  increased interest rate
Indirect impact – exclusion of some borrowers;
slower decision making process
Suggestions for Empirical Testing
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Look at insurance markets when information is
in flux.
Attempt to replicate the analysis in other
countries (look at behavior in emerging
markets where exposure to extreme risk is
more common.