Risk

February 14th, 2009
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My column from Thursday’s Fin is over the fold

Over the last few months, we have been reminded again and again how fragile the foundations on which our lives are built can be. Thousands of people have seen lifetimes of work and savings destroyed by fire or flood, or swept away in the incomprehensible cataclysms of financial markets. Tragically, in the recent bushfire disaster, financial losses have been overshadowed by the loss of hundreds of lives.

And despite technological advances, improved information and organizational innovations, individuals and governments have proved unable to prevent, and only a little to mitigate, the impact of these disasters.

Some of our protections have proved worse than useless. It remains to be seen, for example, whether advice to ‘stay and defend’ homes has discouraged early evacuations that might have saved lives. And it is already clear that derivative assets that were supposed to mitigate and diversify financial risk have actually amplified and convoluted them.

Risk and uncertainty attend everything we do. However carefully we plan, our projects may be derailed by unforeseen contingencies. But we don’t always plan carefully. And, all too frequently, we dismiss ‘worst case scenarios’ as being too awful to think about, rather than carefully considering whether or not they can happen and how to prevent them.

Even when the problems are evident, as with climate change, we shrink from the necessary remedies. It all seems too hard, and there are so many ways to dodge the issue: from the allegedly hardheaded political calculations of professional compromisers to the “Let George do it” irresponsibility of climate laggards to the delusional belief that the whole problem has been made up by grant-grubbing scientists or evil UN bureaucrats.

Matter are even worse when several intractable problems are intertwined. The financial crisis complicates the problem of responding to climate change, and raises questions about the usefulness of market-based responses. Climate change increases the likely frequency and severity of natural disasters such as bushfires and extreme weather events that cause floods. And natural disasters put more stress on insurance companies already weakened by the breakdown of financial markets.

Our current incapacity to respond adequately to our problems can be traced, at least in past, to cultural and political attitudes that developed in many countries, and particularly English-speaking countries, during the 1990s. A series of developments including the return of strong economic growth, the end of the Cold War, and the globalisation of trade and finance on what was essentially a US model,

Pessimistic predictions from environmentalists (most prominently the Club of Rome in the 1970s), from economists concerned about such developments as the growth of current account deficits and from political scientists who saw signs of imperial overstretch seemed to have been (and to some extent were) triumphantly refuted. There seemed to be no problem that could not be solved by a combination of new technology market forces and military power.

For individuals, the rise of the Internet seemed to abolish constraints of all kinds. Princeton University economist Robert Shiller has written about the way the stockmarket boom of the late 1990s was driven by the feeling of mastery obtained when people first use the Internet.

At its worst, the over-optimism of the 1990s has ossified into an ideological and tribal commitment to ignore any information that might cast doubt on the rosy scenarios of triumphalism. This is most evident in relation to climate change. But the same thinking was evident throughout 2008 among those denying that the US economy was in a recession, or in any danger of it.

How can we respond better to the risk of extreme events? One lesson that needs to be learnt is that of the danger of hubris and complacency. The fact that some problem has been successfully managed for a number of years, does not mean it has been solved, and can be ignored. Otherwise success in managing relatively minor shocks can make big disasters even worse.

There are some classic examples of this problem in flood mitigation,. Levee banks that prevent minor floods can reduce preparedness for the rare, but inevitable severe floods that break the banks.

We must also look for better ways to spread risk, so that the costs of extreme events are shared. In doing this, we need to maintain incentives for individual responsibility. Also, as with physical mitigation, it is important to avoid institutions that smooth out small risks while amplifying large ones.

We cannot eliminate risk, or make extreme events impossible. But with a combination of individual responsibility and collective action, we can reduce the severity of such events and share the burdens of their impact.

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  1. Donald Oats
    February 15th, 2009 at 00:04 | #1

    The problem with extreme events is that they are rare by definition. The 1939 bush fires were the extreme of the day, but by 2009 we have probably experienced a parametric shift in the probability distribution for both severity and frequency.

    The 1939 fires, if they recurred, would be considered bad but not impossible to handle. By contrast, this year’s fires have been without parallel. The main difference in severity has been the change in ambient temperatures of our extreme fire danger days. It is basically a degree hotter now compared with the 1930s and 1940s. This means that even if the frequency of extreme fire events remains the same, the damage wrought is likely to be higher.

    Once we add the extra factors in, such as population increase, treechange, less suitable housing and the like, then the level of damage increases again.

    Finally, the Eco Report on Sky Business Channel 602 interviewed a scientist (I missed his name) who gave a very good explanation of the risk assessment of fires, and why the 2009 event (including the damage to human property and loss of life) is unpreventable. Given recent arguments in the media concerning controlled burning etc, this scientist is well worth listening to. The Eco Report is repeated twice more this weekend.

    Regards,

    Don from Murray “Dustbowl” Bridge.

  2. Ender
    February 15th, 2009 at 11:44 | #2

    JQ – I am sure I have posted this book before

    http://www.amazon.com/Overconfidence-War-Havoc-Positive-Illusions/dp/0674015762

    however the same type of overconfidence that leads to warfare could lead to some people minimising the risk of ‘stay and defend’ and also over estimating their capacity to defend their houses. After all you cannot test your capability beforehand and you cannot prepare yourself, if you are not a firefighter, for the sheer terror that must accompany waiting for a fire front to pass.

  3. Jill Rush
    February 15th, 2009 at 21:56 | #3

    “One lesson that needs to be learnt is that of the danger of hubris and complacency.”

    A second lesson is that the solutions need to be simple and understandable to a range of people with very different backgrounds. Further people should not have to answer for actions undertaken which would normally be illegal. The pub owner who saved his town and its people by his quick thinking by “borrowing a bulldozer and clearing the area around the town should not now have to answer to bureaucracy for the methods he used.

    Unfortunately for many the risk that is identified through bureaucratic means is not the risk that matters in an emergency. The bureaucratic response can be the biggest risk of all as it is often devised by people with no practical experience or understanding. The solution can be complex, put responsibility back on the individual and have big gaps.

  4. observa
    February 16th, 2009 at 02:29 | #4

    AS3959(1999)attempts to classify bushfire risk and is then referenced by the BCA in order to design homes for the various levels of risk. Now this is a very complex business(actual home risk on a given day depends on adjacent fuel loads, site slope, FFDI/GFDI, etc) being whittled down to some simplified classifications but clearly proximity to forest is the critical factor. On that basis bushfire hazard is categorised thus-
    Low risk (forest >100M) Medium risk (forest 60-100M) High risk (forest 35-60M) Extreme risk(<35M)where Low is standard construction with subsequent higher construction specifications until that Extreme category(forest<35M) which is in the ‘Don’t Build’ category, or largely one for fire engineering experts only on a must have basis(ie you might need to house a forest fire spotter) You need to measure 35M from any extremity(eave, balcony or verandah) of your suburban home to appreciate what that Extreme category limit means and then think about all those homes you’ve seen that exist in that category. On any serious upslope above forest that 35M minimum becomes a sick joke if you think you’ll stay and defend a BCA Level 3 home and most fire engineers would be getting mighty nervous about their indemnity insurance, should he be required to house that fire ranger there.

    For the adventurous on flat ground and at least 35M clear to the forest all round, they might consider thrill seeking in the following specs home- Slab on ground, all steel framed, brick veneer(or stone, rammed earth, AAC block/panel veneer)with fire rated doors and window shutters, iron roof with reflective foil blanket under, steel fascias and gutters, all steel verandahs (beams, posts, iron roof) with 22000L concrete tank water supply, roof sprinklers and pump and perhaps a bottled air supply to boot. It would probably want to be a rectangular box to avoid articulated roof problems(valleys)for ember and ash sealing.

    Come to think of it, I’d even consult that fire engineer to see whether a couple of layers of 13 mm Firecheck plasterboard might be advisable directly under that iron roof vis a vis that foil blanket. That’s because the different BCA Bushfire protection levels have to withstand certain heat application levels for 10 minutes. eg Level 1 -16KW/sm, Level 2 -21KW/sm, Level 3-31KW/sm and that ‘Don’t build’ Extreme a whopping 60KW/sm. Most of those tree retreaters haven’t got a clue about any of that. Just got my urban house and contents policy renewal by the way and I see it’s jumped just over 20% to $648 a year, no doubt due to their new investment environment. Now for that new flood and bushfire risk environment methinks.

  5. Chris Warren
    February 16th, 2009 at 08:24 | #5

    I couldn’t help but notice that several photos of burnt out houses suggest they were built on relatively high ground.

    This would multiply the risk.

    I notice many houses around Asquith and Mt Colah in Sydney are built on ridges adjactent to steep wooded valleys and gorges, so they are asking for trouble.

  6. February 16th, 2009 at 08:28 | #6

    We reached or are reaching the lower bound of worst case scenarios in the following areas:

    – Iraq-attack
    – Global Financial Crisis
    – Anthropogenic Global Warming
    – Victorian Bush Fires

    Also, things could have gone alot better with the liberalisation of CIS. It turned into a demographic disaster for the Russian people. A fact largely ignored by the vast majority of commentators and pundits.

    However the PRC has progressed along rather nicely. So we can at least take some comfort from the fact that high-IQ nerdy dictators appear to know what they are doing.

  7. rog
    February 16th, 2009 at 08:38 | #7

    “I notice many houses around Asquith and Mt Colah in Sydney are built on ridges adjactent to steep wooded valleys and gorges, so they are asking for trouble.”

    They sure are and a lot of those new subdivisions are by govt bodies – it is much easier to run a serviced road along a contour.

    Govts can make a lot of money from developing Crown land, I think the equation is $3 return for every $1 spent. The big problem is political.

  8. Alanna
    February 16th, 2009 at 09:07 | #8

    A classic example of this Rog was the throwing out of Kuringgai Campus Lindfield by Kuringgai Council (ex state educational land purchased from the C’wealth crown lands for approx 44,000 pounds in 1960s) and then sold to UTS for $1 by the Chadwick Government in 1994. UTS plans to construct around 500 dwellings (unit blocks and townhouses) were rejected by Kuringgai Council resoundingly and then with little adjustment Sartor was approached under state significant site legislation. You guessed it – he approved it.

    The 22 h site is ringed with thick bushland on all four sides (Lane Cove National Park), constructed right next to Winchester Rd (the site of a horror bushfire in the last decade that destroyed a number of homes), there is one two lane road in and out and there have been six bushfires come through the site in the past 50 years (which has not affected the campus buildings because they are solid concrete built to withstand – no developer will build like that). Oh and its a maximum fire hazard area – zoned red.

    Its an accident begging to happen if UTS proceeds with its approved plans. We have a bushfire service and fire regulations that SHOULD interface with planning but as noted in todays paper, under the legacy of Frank Sartor, passed to Keneally, retirement complexes or other high density residential constructions are being approved in highly dangerous locations despite fire service objections. Dont mention developer donations to State Labor but without doubt they are driving the process.

    Its precisely because crown land is cheaper but its disgusting and an abuse of planning powers.

  9. rog
    February 16th, 2009 at 09:34 | #9

    Developers have been calling for increases to the land bank for decades (its not rocket science just simple maths); it is the same planning power that has created this dire shortage leading to developing land otherwise unsuitable.

  10. rog
    February 16th, 2009 at 09:36 | #10

    Better land is available in the Hunter but the same old crowd are up there blocking planning

  11. Alanna
    February 16th, 2009 at 10:30 | #11

    Im inclined to agree Rog to some extent. The initial push for medium density to make more efficient use of urban spaces, solves some problems and introduces new ones. You can have medium density but it also requires corresponding planning in infrastructure improvements (you can push more people into closer proximity to the city) BUT if it then places pressure on transport systems there (something the State Government has been sadly neglecting). IF that isnt done at the same time they may stop the urban sprawl and but replace it with an inner middle ring outer ring traffic nightmare to get to work. That places up ward pressure on medium density prices, the closer you are to the city this reverses part of the initial argument for medium density ie it will deliver more affordable housing. Well it delivered a lot of developer donations and now we have a traffic mess, unaffordable smaller properties, and the risk of medium density turning into high density with a lack of social infrastructure. Politics trumps planning.

  12. Socrates
    February 16th, 2009 at 12:06 | #12

    I personally think that one of the problems in poor management of risk is the existence of “specialist” risk managers. The process of risk management is easy. Knowing what the serious risks are and how to solve them is the hard part. The former can be an elective in a 2 year management course. The latter takes years of experience on top of qualifications in the relevant field.

    I think the idea that a “risk manager” can know how to deal with risks across many different fields is absurd. We have too many professional managers and not enough people skilled in the relevant underlying field of physical science, biological science or engineering. One of the biggest problems with climate change, for example, is that most of the decision makers know virtually nothing about science.

    I think the solution is along the lines of JQ’s ARES speech theme – people who are expert in a field must speak out. Otherwise the debate is dominated by those who are either ignorant or have a vested interest to push.

  13. Jill Rush
    February 16th, 2009 at 16:54 | #13

    Socrates – one of the big problems we are encountering in modern society is that someone with a qualification can override someone who has a wealth of experience. The rise of the MBA and the Managerial class in conjunction with the Neo Cons is a book waiting for an author.

  14. February 16th, 2009 at 18:56 | #14

    Alanna Says: February 16th, 2009 at 9:07 am

    UTS plans to construct around 500 dwellings (unit blocks and townhouses) were rejected by Kuringgai Council resoundingly and then with little adjustment Sartor was approached under state significant site legislation. You guessed it – he approved it.

    Does the NSW ALP Right exist for any reason other than to flog off public assets through sweet-heart deals to property developers and merchant banks? Oh yeah, to use ethnic lobby-fodder to stack branches. So that juicy cabinet posts can be in the gift of factional war-lords.

    And to think I once had some faith in these guys. At least it did not long survive the triumph of experience.

  15. Ernestine Gross
    February 16th, 2009 at 19:08 | #15

    Socrates @12, I fully concur with you.

    Originally, MBA courses were designed for scientists and engineers to assist them in taking up managerial roles in the later stages of their careers. These people used to bring applied contexts and experience to classes.

  16. Alanna
    February 16th, 2009 at 19:19 | #16

    14#Jack.
    Well yeah. What can I say. I dont like them either. Not one bit. Any school, any park, any once public social capital infrastructure or facility or public piece of land was up for grabs under Sartor for residential development – dont leave any public lands there for the newly crowded in residentially compacted residents to enjoy. As for Kuringgai – it wasnt just an educational facility, but a library, and playing fields and an auitorium used by nearly every primary and high school from the North West to the Northern beaches for school plays, eisteddfords, art competitions and sports each and every year since it was built in 1970 and you name it (market days, private sector meetings and conventions). As well as that the building won the Sulman award for architecture and every known organisation (Fire, Heritage, Kuringgai Council, RTA, students association, employees, staff, residents, Royal Architects institute – the whole lot) opposed its sell off and redevelopment into units (except UTS who got Kuringgai for $ bloody dollar and wants to trade it for city campus refurbishments and glamour and ignore the thousands of students who have been using Kuringgai for 30 years – this prime piece of land built with integrity for the community and designated educational use only 40 or 50 years ago by purchase from State from CWealth).

    Sartor is gone (and good riddance) but the same old ethos continues in State Labor…and they call themsleves an alternative to conservative governments? Ha! Barry O’Farrell in fact was the only one who moved a motion against its redevelopment and called for some sort of just compensation by UTS (yes- give me my parents taxes back – because thats what paid for it).

    The Labor party sat there on their bums and ignored history, ignored their morals,ignored their consciences, ignored the needs of the community and ignored once core labor values and ignored OFarrell’s motion (every single damn one of them) and delivered a bloody windfall profit to UTS and no doubt a windfall donation to the labor party (and the loss ofcommunal lands to everyone else).
    And where was Carmel Tebbutt – education minister with the power to override Sartor?

    SILENT. ALL OF THEM.

    Pathetic – all of them. Do I want to see them voted back? NO.

  17. Alanna
    February 16th, 2009 at 19:26 | #17

    And yes, one man (Frank Sartor) overrode all those government departments recommendations over 22 ha of educational land in Lindfield, with a construction on it purposely built for education with one of the largest nurse training facilities in it, and teacher education, and over one thousand written objections to UTS proposed rezoning and development lodged with Kuringgai Council.

    One man overrides all that.

    Tell me the system of State Government isnt sick?

  18. Socrates
    February 16th, 2009 at 19:27 | #18

    Ernestine 15

    Yes I am aware of that. MBAs have become a commodity rather than a piece of learnign. When I first did my economics degree I considered doing an MBA instead. Back then my engineering degree would have gotten me in but now you can get in without a base qualification! (I don’t blame academics for this either – I know uni adminsitrators look at MBAs as cash cows).

  19. Alanna
    February 17th, 2009 at 14:40 | #19

    I notice again the State Planning Minister Ms Keneally in the paper today saying her department listens to the outcomes of community groups consultation with any state significant DA called in. No, they dont. That is rubbish. Community consultation is a process managed by one stop developer service firms that are contracted by and work for the developer. The people employed by the developer service firm, hired by the developers often refuse to even record objections of community reference groups. They employ tactics like the separatation of community conultation group represenetatives, tell them they cant speak to each other and refuse to address their concerns and then report to the developer and the likes of Ms Keneally – “no community reference group objections to that.” The community consulation group on Kuringgai Campus all resigned en masse and sent their concerns to the farce that was “community consultation” to the Vice Chancellor.

    Ms Keneally, NSW planning minister, the process of community consultation does not exist or is a dishonest farce and most people know this (and your department has far too much power to ride roughshod over the people of NSW and other government departments and their public and community lands for the pecuniary benefits of NSW state Labor).

    Seeing as we are on the subject of risk; this party is an unnacceptable risk to us all.

  20. melanie
    February 17th, 2009 at 22:07 | #20

    I was talking to a colleague today who teaches a unit that, inter alia, deals with the issue of unemployment. In recent years he said that he has felt under pressure from students to abolish this section of the course. The students had no experience of such a thing and considered it exotic and of historical interest only.

    It seems that the main function of the commentariat is to soothe. Advertising propaganda rules. Risk is only apparent after the event.

  21. Ubiquity
    February 18th, 2009 at 22:31 | #21

    JQ

    Enjoyed your article. I think the importance of including the analysis of risk in all facets of life is often neglected and placed in the “to hard basket”.

    You say

    “We must also look for better ways to spread risk, so that the costs of extreme events are shared. In doing this, we need to maintain incentives for individual responsibility. Also, as with physical mitigation, it is important to avoid institutions that smooth out small risks while amplifying large ones.”

    Mark Cooray says something along those lines to a point,

    ” Safety In Risk
    The whole of our civilisation in its spiritual as well as its material aspects rests upon an endless accumulation of risks taken over successive generations by individuals. The consequences, good and bad, of these actions have been accepted by these individuals and not by society as a whole. In most cases, when the outcome is negative, the one to suffer has been the risk taker. When it has been positive, the whole society, including those who chose not to take risks, has taken the benefit.

    In our society, the non-risk takers ride on the backs of the risk takers. The converse cannot be true. Calculating risks is a matter of common sense for the individual. For the State to seek to eliminate them altogether, abolishes the role of the individual and has, as we have seen, dangerous consequences. Not to take risks, is the biggest risk of all.”

    You identified hubris and complacency as major problems, more specifically I think “Ideological hubris” and “Ideological complacency ” is more to the point. It is often our ideologies that do not permit us to take a leap in directions likely to have better outcomes.

    Others (most) prefer not to take risk and are followers. We must however take care to nurture risk taking.

    Of course the above points can be used on either side of the ideological spectrum to provide ammunition for their arguments. Ultimatley, it is the action followed by its result that allows us to remeasure our next response.

  22. Ernestine Gross
    February 19th, 2009 at 09:25 | #22

    The quote of Mark Cooray @ 21 raises a question in my mind:

    What are the possible consequences of people, who are skilled in saying nothing very articulately, having influence on policies of groups (families, enterprises, governments) that have measurable consequences for at least one person? I propose the existence of such activity constitutes a serious risk category. Any suggestions for a name of this risk category?

  23. Alanna
    February 19th, 2009 at 09:39 | #23

    Ernestine#22 “sprisk” (spinrisk) or “hubrisk” springs to mind.

Comments are closed.