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“New Learning” Barnard’s Inn Hall Holborn London EC1N 2HH Tel: +44 (0) Fax: +44 (0) © Gresham College 2007 Mercers’ School Memorial Professor of Commerce Michael Mainelli Does Society Risk My Life Through Safety? The Perils Of Too Much Risk-Aversion
© Gresham College 2007 Outline “Get a detailed grip on the big picture.” Chao Kli Ning Universally risk-averse Who’s playing God? Precautionary Principle The risk industry Risk-seeking or risk- averse? Risk supply and demand Regulating risk regulation
© Gresham College 2007 Universally Risk-Averse
© Gresham College 2007 Odds Of Dying Source: US National Safety Council [focus on Accidental Deaths, does not sum to 100%]
© Gresham College 2007 Risk Changed My Life
© Gresham College 2007 Unintended Consequences [Source: Better Regulation Commission]
© Gresham College 2007 Government’s Desired Risk Policy a)emphasise the importance of resilience, self-reliance, freedom, innovation and a spirit of adventure in today’s society; b)leave the responsibility for managing risk with those best placed to manage it and embark on state regulation only where it represents the optimum solution for managing risk; c)re-examine areas where the state has assumed more responsibility for people’s lives than is healthy or desired; and d)separate fact from emotion and emphasise the need to balance necessary levels of protection with preserving reasonable levels of risk.” [Better Regulation Commission, “Risk, Responsibility and Regulation - Whose Risk Is It Anyway?”, 2006] “In its policies, regulations, announcements, correspondence, targets, performance agreements and actions, the government should:
© Gresham College 2007 May You Live In Interesting Times wéijī = wéixiăn + jīhùi = crisis = dangerous + opportunity
© Gresham College 2007 Disinformation LIKELIHOOD SEVERITY High Low High Low Ignore Strategic Decisions Monitor Cost Information Strategic options: avoid avoid pool pool mitigate mitigate eliminate eliminate Modern Tradition
© Gresham College 2007 Philosophy Of Perception “ Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don't know we don't know.” Donald Henry Rumsfeld [1932-*]
© Gresham College 2007 Who’s Playing God?
© Gresham College 2007 Apocalypse Now “We are running out of oil; we’re extracting annually more than we discover …” “Asteroids are going to crash into the earth and destroy all mammalian life …” “Avian flu is going to kill tens of millions …” “Global warming is going to destroy civilisation …” [Picture from The Sunday Times, “To The End Of The Earth” (climate change), 11 March 2007]
© Gresham College 2007 Precautionary Principle “For every difficult question, there is an answer that is clear and simple and wrong.” George Bernard Shaw
© Gresham College 2007 Risk/Reward Calculation For Engineers RISK: public humiliation and the death of thousands of innocent people REWARD: certificate of appreciation in a handsome plastic frame
© Gresham College 2007 Stern Discounts
© Gresham College 2007 Illusion Of Control
© Gresham College 2007 Risk Industry
© Gresham College 2007 Consensus Science
© Gresham College 2007 Jammed Gears State Role Societal Cost Reduced Precaution Safety Weakened Responsibility Weak Recourse Increased Individual Freedom Weakened Obligation Take On Debt Cash In or Cash Out Risk-SeekingRisk Averse
© Gresham College 2007 Back To The Future Savings Investment Returns Security Uncertainty Weak Recourse Loss Weakened Obligation Take On Debt Cash In or Cash Out Risk-SeekingHard Savings
© Gresham College 2007 Risk/Reward Management?
© Gresham College 2007 Bad Framing Prospect Theory On A Postcard People evaluate rewards and losses relative to a neutral reference point People adopt risk-averse behaviour concerning gains People adopt risk-seeking behaviour over losses People’s response to loss is greater than their response to gain People tend to give too much emphasis to low probability events
© Gresham College 2007 Prospect Theory On A Curve Value Gains (Chooser’s Units) Objective Losses (£’s) Objective Gains (£’s) Value Losses (Chooser’s Units) Risk-Reward Neutral
© Gresham College 2007 Risk – Supply and Demand Price Quantity Demand Supply
© Gresham College 2007 Risk – Supply and Demand Price Quantity DemandSupply
© Gresham College 2007 Under Or Over Protected?
© Gresham College 2007 Perception = Risk “Of course I don’t believe in it! But I understand that it brings you luck whether you believe in it or not.” Niels Bohr ( ), Danish physicist, when asked why he had a horseshoe on his wall
© Gresham College 2007 Discussion Is it inevitable that debates about science, safety and risk are political? How might we encourage more informed debate without being submerged by the detail? What potential do micro-risk markets have for you?
© Gresham College 2007 Does Society Risk My Life? The Perils Of Too Much Risk-Aversion Thank you! “Get a big picture grip on the details.” Chao Kli Ning
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