Behavioral economists are finding that businesspeople often fail to account for low-likelihood, high-impact events when planning for disaster.
“There’s no such thing as an accident,” the old saying goes. Examine this notion that all accidents are preventable, and you’ll discover it’s often, though certainly not always, true.
To make the point, take a hypothetical tire blowout on a small-business delivery van. It occurs on a congested freeway and ends in a multi-car crash that seriously injures six people, including your employee. What led to the blowout?
- The tire tread began delaminating from the underlying rubber plies and the tire blew when it hit the rough edge of a concrete pothole.
- To save some money during a tough business year, the business owner had chosen lower-end tires from a discount supplier eight months earlier.
- The tire manufacturer turned out to have a sketchy quality record, especially on its lower-end tires, and later was forced to recall 35,000 tires.
It’s not hard to see how this particular tire might never have been on this van on this road at this time, and thus no blowout and chain-reaction injury accident would have occurred. Yeah, you might retort skeptically, but who could have foreseen this unlikely chain of events leading to such an outcome?
Preparing for low-likelihood, high-impact events
The difficulty and inherent unwillingness of human beings to “imagine” such scenarios and then prepare for low-likelihood, high-impact events in the future are precisely what trip up businesspeople time and again, write Howard C. Kunreuther, professor and co-director of Wharton’s Risk Management and Decision Processes Center, and Geoffrey M. Heal, a professor of economics and public policy at Columbia University, in a June 2012 paper for the National Bureau of Economic Research.
What factors work against people and businesses protecting themselves against such possible events? Kunreuther and Heal postulate several, including:
- Discounting events that may occur, if at all, far into the future. Immediate issues carry far more weight than distant possibilities.
- Postponing decisions, especially when they involve creating protections against abstract future events. The authors cite the behavior of emergency planners in New Orleans before Hurricane Katrina as an example of this sort of procrastination.
- The effect of interdependency — if your neighbors or peers are not acting to protect their businesses in similar situations, you may be less likely to act yourself.
- Underestimating the risks, as was done by the small-business van owner in the hypothetical example above.
‘I won’t let that happen to me’
Risk underestimation, similar to discounting future events, is a key error that can occur in decision-making among individuals and businesses, notes Yale law professor Christine Jolls in a 2009 interview published in Qn, a publication of the Yale School of Management. Jolls cites studies in which people were presented with a future risk that has been specified as having a 1 percent chance of occurring. Evidence indicates that most people will believe their personal risk is well below 1 percent. Jolls refers to this as “unrealistic optimism,” and describes how such an erroneous assessment can create substantial problems.
For example, some critics of workplace safety laws object to them as paternalistic and suggest that warning employees of workplace dangers should be enough. However, Jolls cautions that such warnings alone, because of our human proclivity for unrealistic personal optimism, may lead some to underestimate their personal risk.
Lack of specific workplace risk evaluation and the failure to create and enforce explicit, non-negotiable work rules can clearly elevate risk for the employee and, by extension, for the business owner.
Review your business risks
It could be useful to review your business’s disaster assessment and plan against the behavioral factors identified above. Does your plan accurately and fully account for all possible risks, especially those of low probability and high impact, as realistically as they can be expressed? If not, what changes would you make to the plan and, more important, what additional resources might you have to apply over time to ensure it is fully funded? The time and cost to do this work may seem daunting, but the risks — and disasters — avoided can make it well worth the effort.
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