Working Paper: NBER ID: w18136
Authors: Howard Kunreuther; Geoffrey Heal
Abstract: A principal reason that losses from catastrophic risks have been increasing over time is that more individuals and firms are locating in harm's way while not taking appropriate protective measures. Several behavioural biases lead decision-makers not to invest in adaptation measures until after it is too late. In an interdependent world with no intervention by the public sector, it may be economically rational for those at risk not to invest in protective measures. Risk management strategies that involve private-public partnerships that address these issues may help in reducing future catastrophic losses. These may include multi-year insurance contracts, well-enforced regulations, third-party inspections, and alternative risk transfer instruments such as catastrophe bonds.
Keywords: catastrophic risk; behavioral biases; risk management; private-public partnerships; catastrophe bonds
JEL Codes: D62; D80; D85; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| behavioral biases (D91) | decision-making (D70) |
| hyperbolic discounting (D15) | decision-making (D70) |
| peer behavior (C92) | individual risk management decisions (G52) |
| public sector intervention (H44) | investment in protective measures (G31) |