All Risk Is Local

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It’s a scary world. New risks continue to emerge, but none of the old ones ever seem to disappear. Fortunately, the World Economic Forum partners with many international risk experts each year, and together they present their Global Risk Report, which features a breakdown of the most critical threats facing our world. This might not solve any problems in and of itself, but it certainly does help to at least know what we are up against. To better understand some of the greatest challenges currently facing the globe, we recently spoke with one of the key participants who helped put together the report, Howard Kunreuther, co-director of the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania.

RM: While this year’s Global Risk report was being developed, what were the main risk themes that stood out to you?

Kunreuther: Risk management is now becoming more critical in the global world that we’re living in. That’s the first point. The second one is myopia, the fact that we are very short-term in our thinking-and that it may very well be important to figure out how we can develop long-term strategies. That’s the third point, finding a way to think long term. And then the fourth point is how you get people to do things before [catastrophic] events occur –whether they are financial events or natural disasters or terrorism — to protect themselves rather than constantly reacting to the events.

RM: So many disasters seem like they should have been preventable.

Kunreuther: Absolutely. And not just the natural hazards; the financial crisis is a classic example of where things could have been done beforehand to avoid a lot of the problems that happened afterward. Then the question is whether regulations can stem that in the future-in this case, whether the Dodd-Frank bill is the appropriate way or whether there are other things that can be done.

RM: Given the increasingly globalized nature of the world, how important are the national, more localized efforts like Dodd-Frank and some of the new rules in Europe as opposed to the wider policy-making efforts like Basel III, Solvency II and other international schemes?

Kunreuther: To the extent that you can get individual countries to think through a problem, we may have a better chance of succeeding through global negotiations. But I think that unless you can have the countries dealing with this first, it may be very, very hard to get international agreements. The financial aspect highlights that. The climate change negotiations are a very similar thing. If we don’t do things within Congress to deal with climate change, it is going to be very, very difficult to do things from the point of view of any global agreements. I think the two can go hand-in-glove.

The global governance failures, which are a key part of the Global Risk Report, really highlight the systematic failure of these global discussions. And frankly, the myopic thinking exacerbates this. There is a feeling that we have to get benefits immediately.

As you may know, we have a little acronym called NIMTOF: Not in My Term of Office. So the answer of how you go from countries to an international negotiation, I think you need to get the countries on board first.

RM: What specific risks do you view as the most troubling going forward?

Kunreuther: The area that raises a lot of interesting questions is the water/food/energy nexus with respect to how agriculture consumes 70% of the total global water demand and we’re predicting that in 2030 there will be 5% of road transport powered by biofuels-but that may consume [a significant percentage] of the water used worldwide for agriculture. So we have an interesting example in that case of the interdependencies. You want to have biofuels, but what is that going to do to the consumption and need for water? So you then raise the price of water, and that is going to have very high social impacts in many countries. What are you going to do in a case like that? Are you going to subsidize countries that need the water? What kind of strategies will be developed? It is those kind of issues that we have to think about on a broad level.

RM: Another challenge that is both international and can affect individual companies is cybersecurity. But it can be hard to get a grip on what the real risk is. To what degree should this frighten us?

Kunreuther: It is the kind of thing that we are all probably more concerned about than anything else. What happens if we don’t get our email for an hour-let alone for a day? What happens when someone invades our system? It’s the type of thing that we don’t like to think about, but when it happens we know we’re in trouble.

And it is troubling because we often don’t know what to do to prevent it. What could you do personally or what could your company do? What can we do as a country? It’s a great example of the challenges we face on what can be done on a very localized level versus a broader level. And it’s not at all clear what steps could easily be taken to deal with it.

RM: It seems like the steps remain unclear not just with cybersecurity but on many of the key threats raised in the report.

Kunreuther: I think the big challenge in this area is how do you create enough of a sense of urgency of the problems? You raise the cybersecurity threat. We hear it, and we say it’s a major problem. Well, whatever the risk may be, when we talk about them, we say “we should deal with them.” But how do you create that sense of urgency in political leaders, business leaders and, really, individuals and the public so that there is enough pressure to do things now to avoid the kind of problems that we are going to have if catastrophe occurs?

That’s the major challenge, and the myopia-which we are all a part of, and I don’t exclude myself from that-really diverts us from the long-term thinking and strategy. And that’s where well-enforced regulations and pressure on Congress to pass legislation [can help].

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