Beach Reading?

By: Dr. Gary Anderberg

August 14, 2023 — Looking for that perfect book to read at the beach? Well, Behavioral Economics: Policy Impact and Future Directions is probably not it — if you want to avoid getting a few odd stares while sitting in your beach chair. On the other hand, this is an important new volume in the growing discipline of behavioral econ which examines how the quirks of human psychology drive our daily decision making processes. The first Big Book which defined this area of study for us general readers was Daniel Kahneman's best seller,Thinking Fast and Slow in 2011*.

OK, so what does this mean for risk management? A great deal of risk seems to arise from the not always logical ways in which people behave in conducting business or living generally. Kahneman defined a whole litany of ways in which our not quite fully evolved minds regularly commit errors in judgment which lead to unexpected events. A good deal of human-based risk** can be understood and anticipated if you are familiar with such widespread phenomena as the anchor effect, left digit effect, or confirmation bias.

The book focuses on the public policy implications of behavioral economics, but public policy directly intersects our risk anticipation and control efforts. One area of major importance to policy wonks and risk experts alike is how we deal with climate change or, in another case, how the ways in which we think about structuring benefits for our employees impacts our ability to hire and retain the people we need to run our businesses.

For example, take this opening from the chapter on climate change:

Problems associated with global climate change are largely the result of human behavior that is intricately embedded in people's daily lives and entwined with societal and cultural norms (Constantino et al., 2022). Thus, mitigating and adapting to climate change requires changing human behavior and practices and sustaining those changes [emphasis added].

Ask yourself — how often do we risk managers need to change human behaviors to mitigate risks of all kinds? How do we sustain such changes? Yes, these are issues we wrestle with every day. Anticipating and managing human risk behaviors is right at the center of our work. I grant you that this volume is not the kind of book where you get lost in the story and forget all about the stuff you left on your desk back at the office***, but I think you should seriously consider working it into your reading schedule. The paperback is a bargain at $25.00 or you can download it for free and read it on your computer.

We love our actuarial studies and our beautiful Powerpoint slides which show lots of seductively precise metrics tracking accidents and costs or summarizing complex exposures in powerful new graphics, but, my friends, the heart of risk is still the messy, often illogical, backwards looking, habit-ridden human mind. All risk is ultimately based on people doing things, making decisions, talking to other people, living their lives as best they can. The more you know about behavioral economics, the more effective you'll be at driving less risky behaviors and heading off wrong turns. Keep in mind: risk = behavior and vice-versa.

*A popularization of the academic work that won him the Nobel Prize in Economic Sciences in 2002. His work, along with that of others in this burgeoning field, establishes a cognitive basis for the characteristic human errors that drive our often illogical choices and our risky behaviors.

**Alas, behavioral science does not help us anticipate the occurrence of destructive weather or earthquakes, although it can help us understand why otherwise rational people insist on building expensive facilities in known hurricane, flood and tornado areas or smack across fault lines.

***If all goes to plan, for summer 2024, you'll have my next western, The Last Train to Perdition, available to while away those languid hours by the sea.