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Coastal Heritage – Summer 2012
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No Worries? The New Science of Risk and Choice
VOLUME 26, NUMBER 4, SUMMER 2012                   PDF FILE     

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Coastal Heritage is a quarterly publication of the S.C. Sea Grant Consortium—a university-based network supporting research, education, and outreach to conserve coastal resources and enhance economic opportunity for the people of South Carolina. To subscribe, email your name and address to Annette Dunmeyer.

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A view from Apache Pier in North Myrtle Beach, S.C.

No Worries? The New Science of Risk and Choice
By John H. Tibbetts

A giant SUV cuts you off in evening traffic. Braking hard, you maneuver out of danger. Thank your quick reflexes for that. At home, your toddler’s drooping eyes signal her exhaustion. Carry her early to bed. At supper, you feel a chill in the room—it’s your spouse’s icy stare—so the Blackberry is turned off and stashed away.

We make countless rapid decisions a day. We can react effectively to a physical threat—an aggressive driver—and minutes later respond to fleeting, unspoken signals from a loved one.

This kind of intuitive, reactive thinking serves us well much of the time. But the human brain often makes mistakes, especially when it must choose between our short-term desires and longer-term welfare.

Of course, it’s reckless to text and drive, or to eat a half-dozen glazed doughnuts for breakfast every morning, or to put up a luxury home on a narrow, dynamic strip of beach in a hurricane-prone region as sea level rises—yet people keep doing them anyway.

Seven years after Hurricane Katrina hit New Orleans, people continue flocking back into the city, rebuilding homes and businesses on sites below sea level. New Orleans now has nearly the same population as it did before the storm.

Engineers have mended floodwalls that collapsed, upgraded pumping facilities, built new floodgates, and reconstructed walls that had obvious structural weakness. But storm-buffering salt marshes continue to drown and global sea level continues to rise. So New Orleans will face an increasing threat from storm surges for many years to come. Why move back there?

“People don’t perceive risk,” says Dennis Mileti, a professor emeritus of social psychology at the University of Colorado. “When you build a dam or levee, people believe they are totally safe. Politicians allow more development behind the levee, which only postpones future [disaster] losses, and there are more people to kill. Nature always exceeds what people build for.”

At some point, Charleston evidently forgot the catastrophic earthquake of 1886. Says Mileti, “When you look around Charleston now and see all of the unreinforced masonry buildings, you’d think there was not an earthquake threat there.”

Before Hurricane Katrina, many residents similarly forgot about the New Orleans’ flood-protection system. Or perhaps they just took it for granted, failing to understand that every levee and floodwall has the potential to fail. Levees, dams, and beach-nourishment projects are seen as permanent features, though of course they only hold back forces of nature that can’t be contained forever.

For thousands of years, people around the world have built and rebuilt towns and cities on coastlines vulnerable to hurricanes, floods, earthquakes, and tsunamis.

But coastal disasters have become more costly than ever. Over the past two decades, much of the nation’s explosive population and economic growth has been concentrated in hazardous places, including the hurricane-prone Gulf and Atlantic coastlines.

Florida, for instance, had 13 million people in 1990. Two decades later, its population had ballooned to 19.3 million. Hurricane Andrew, which hit South Florida and Louisiana in 1992, caused $23 billion in damages in 2007 dollars.

Damages from the same storm would be vastly greater today. If Hurricane Andrew had followed the same pathGlobal Thinker Daniel Kahneman in 2004, it would have cost $120 billion in damages in 2007 dollars.

Now, social scientists are increasingly studying how coastal residents perceive their disaster risks and choices.

“People want to live and do business along the coast, but we need to help them understand their risk exposure so they can take actions to minimize losses before disasters strike,” says Tricia Ryan, manager of the Human Dimensions Program at the National Oceanic and Atmospheric Administration (NOAA) Coastal Services Center based in Charleston, S.C. “Studies by social scientists can help us understand the tremendous benefits of doing mitigation—whether it’s elevating structures or not developing in hazardous areas in the first place—rather than just responding after the fact.”

Still, why don’t we worry more about natural disasters? Why don’t we plan and build more effectively for dangerous, costly storms before they strike?

Cognitive research shows that we can’t understand our disaster risks and choices unless we set our minds firmly to the task. But that would require hard work, which the human brain avoids.

As Daniel Kahneman, a professor emeritus of psychology at Princeton University, puts it: “Laziness is built deep into our nature.”

Glucose and reason

One day early in his research career, Kahneman happened to read a study written by an economist at his own university.

“I can still recite its first sentence: ‘The agent of economic theory is rational, selfish, and his tastes do not change.’ I was astonished. My economic colleagues worked in the building next door, but I had not appreciated the profound difference between our intellectual worlds. To a psychologist, it is self-evident that people are neither fully rational nor completely selfish, and that their tastes are anything but stable.”

Kahneman had encountered one of the most powerful ideas in human history—standard economic theory—and recognized that it did not make much sense in the world he knew.

Standard—also known as classical—economic theory says that the human mind is an efficient calculating machine. That is, individuals are almost always rational. Human beings have the same preferences and desires from year to year, and these “rational actors” resolutely pursue their individual happiness and personal welfare. People are irrational only if they are gripped by extreme emotions such as fear, hate, or love.

When buyers and sellers are nearly always selfish and rational in their decisions, producers of goods and services compete relentlessly in the marketplace, and this competition spawns innovation and creates wealth.

The reality, though, is that human beings don’t behave rationally nearly all of the time. If we did, we’d seem alien indeed. We would behave, more or less, like Mr. Spock, the super-rational half-Vulcan in the Star Trek television series.

Instead, we depend primarily on emotion and intuition to perceive the world and navigate our lives.

“We think by feeling. What is there to know?” wrote the poet Theodore Roethke. The past 40 years of cognitive science proves him mostly right.

In the early 1970s, Daniel Kahneman and his friend and fellow psychologist Amos Tversky became pioneers of a new field of science. Over the next 15 years, their experiments reshaped how scientists think about thinking.

In 2002, Kahneman won the Nobel Prize for economics “for integrating insights from psychology into economics.” (Tversky died in 1996, and the prize is not given posthumously.)

In his 2011 book, Thinking, Fast and Slow, Kahneman synthesizes his research and that of his colleagues in psychology, sociology, neurology, and in the relatively new and increasingly influential field of behavioral economics, which draws on both economics and psychology.

To understand how people think, we must realize that the human brain has many different structures, some primitive and some sophisticated, dating from various stages of evolution.

Some two hundred million years ago, evolution provided ancient lizards with simple brains so they could hunt and survive in a dangerous world. A lizard’s brain controls the animal’s heart rate and breathing, and processes information from its eyes, ears, and mouth, telling it to fight or flee.

The human brain still has that wiring. If someone throws a ball at your head, you’ll duck. That’s a response by your ancient “lizard-like brain.”

When mammals evolved later, a second layer of brain cells and connections was added. In a mouse, for instance, this second layer gave it more memory and a broader range of emotions.

For great apes, evolution added a third layer. A great ape needs a brain with an even larger memory to function within a far more complex society than that of a mouse. Over the past 6 to 7 million years, at least 20 hominid species, our closest ancestors, evolved and eventually became extinct, many of them having increasingly large brains. Then about 180,000 years ago, our species, Homo sapiens, emerged with the largest brain of all.

But size can’t explain everything. Women generally have smaller brains than men. So there must be other reasons why humans developed ­cognitively beyond other great apes and hominid species. Perhaps we advanced farther because our brain’s neural circuits became more interconnected and efficient. Or maybe our brains developed stronger, speedier neural pathways.  

From the beginning, our species lived in kin-based groups that were intensely social and psychologically intricate. We needed higher-functioning brains to store and analyze our long-term memories so we could plan hunting-and-foraging expeditions, resolve conflicts, and pass down knowledge to the next generation.

Yet our primitive brain mechanisms are still with us. The human brain stem—similar in function to a lizard brain—continues to transmit physical sensations of attraction, repulsion, and pain.

During our first five years of life, our brain’s circuitry is being developed and linked together—from newer structures to older ones. When we’re about 20 years old this process is complete. Many of our older, sensory-based brain structures work in tandem with our newer memory-based cognitive networks.

For instance, our brain can recognize subtle signals of another person’s mood—a child’s weariness, a spouse’s annoyance—in an instant by remembering similar emotional signals from past experiences and then adjusting our social behavior as needed.

We often know things emotionally before we know them logically. That is, we first understand them intuitively.

Intuition isn’t a mystical thing, scientists say. It’s a very fast recognition system. Intuition allows us to recognize familiar things in new or different contexts and respond appropriately to them.

Scientists have a name for the intuitive thinking process: the Automatic System. Quick, visceral, reactive, imaginative, emotional, and often unconscious, this cognitive system allows us to respond effectively to emergencies such as a reckless SUV driver barreling into our highway lane.

We couldn’t have lasted long as a species if we had stopped and deliberated every time we faced physical danger. “Most of our judgments and actions,” Kahneman writes, “are appropriate most of the time.”

The problem with this system is that it’s error-prone. It doesn’t seek
out opposing views or competing scenarios. A stadium of screaming sports fans is a collective manifestation of intuitive thinking. It’s an immediate, in-the-moment type of cognition.

Our brain, fortunately, has a second cognitive processor, which some call the Reflective System, located in newer parts of the brain. This system is a rational, deliberative, steady backup. It corrects mistakes and revises some of the quick, intuitive judgments of the Automatic System.

The Reflective System—or slow thinking—allows us to make choices consciously. Let’s say your family sends you to a seafood retailer to buy something for dinner. Your choices are Chilean farmed salmon and locally caught shrimp. Your Reflective System kicks in because you will make a conscious choice.

It turns out that the local shrimp is expensive. Plus, your family prefers salmon. But you’ve heard about lowcountry shrimpers struggling to compete against floods of cheap, imported seafood. You prefer buying local products whenever possible, and local seafood is fresher and tastier.

Naturally, you step up and buy local shrimp.

The two systems—slow and fast—often operate in parallel or trade off. A jazz musician deploys slow thinking to choose which songs to play but uses the fast, creative, associative system—or “flow”—when deeply absorbed in performance.

A physician examining a patient with typical flu symptoms during flu season thinks with her fast Automatic System, retrieving memories of other flu patients in the past week. Her Reflective System won’t kick in unless she finds something unexpected in the examination.

Slow thinking is accurate and reliable but tiring. It’s costly in calories. Our bodies burn more energy when we think slowly. As glucose concentration in our blood stream falls, we lose mental focus. We can’t concentrate for long, so we economize. Faced with an especially complicated problem, we tend to give up quickly.

Still, many tough decisions just won’t go away.

Now imagine that you’re calculating costs and benefits of flood-proofing your family’s vacation cottage located on a very low-elevation site near the ocean. Its foundation has been dampened by lunar tides a few times a year.

Should you elevate the cottage on pilings? Should you relocate it farther inland where it’s less likely to be flooded? Should you elevate or relocate your home now or wait a few years?

How much does elevating or moving a home actually cost? Should you wait until a hurricane knocks it down and then take the insurance money and add pilings to elevate the structure? Various members of the family have different ideas about how to flood-proof the cottage.

You’re likely to throw up your hands and say you’ll think about it another time.

“People have to consider so many things before they can measure risk,” says Jessica Whitehead, regional ­climate extension specialist with the South Carolina and North Carolina Sea Grant programs. “Evaluating risk is different for everyone. You might have to factor in Granny’s knees, her difficulty in walking up 15 steps to her front door if her home is elevated. Risk is so complex—can you blame people for not understanding it?”

Cognitive illusions

Many of our irrational decisions are based on cognitive illusions inherited from our distant ancestors. These illusions helped them survive on African savannas, but they aren’t nearly as useful today. Still, we’re stuck with them. 

“Our irrational behaviors are neither random nor senseless—they are systematic and predictable,” writes Dan Ariely, a behavioral economist at Duke University. “We all make the same types of mistakes over and over, because of the basic wiring of our brains.”

One of our common illusions is overconfidence. Most of us aren’t as smart and capable as we think we are. Studies show that 90% of drivers view themselves as above average. Most students think that their smarts will put them at the top of their class. So who among them is mistaken?

We can’t all be better than average students or drivers. Someone must belong to the bottom half. After all, we don’t live in Garrison Keillor’s “Lake Wobegon: where all the women are strong, all the men are good-looking, and all the children are above average.”
As Kahneman points out, “Psychologists have confirmed that most people believe they are superior to most others on most desirable traits.”

We also tend to gloss over risks in our lives. We know, of course, that bad things happen to people. But we tend to believe that bad things won’t happen to us.

In psychological surveys, college students say that they will be less likely than their peers to suffer future misfortunes such as being fired from a job, getting divorced, having a drinking problem, suffering a heart attack, or getting cancer. Most people in most social categories, scientists say, are unrealistically optimistic about the future.

Perhaps tHigh winds can tear off shingleshat’s why so many home­owners fail to renew flood or earthquake insurance policies, although such policies could protect them from ruinous financial losses.

The median tenure of flood insurance in the United States is just two to four years, according to the Risk Management and Decision Processing Center at the University of Pennsylvania. Some researchers suggest that homeowners drop flood policies because they view this form of insurance as an investment that has not paid off.

Or maybe homeowners just forgot why they bought insurance in the first place.

Craig E. Landry, an economist at East Carolina University in Greenville, N.C., and his colleagues studied home prices in Pitt County after a pair of major hurricanes, Fran in 1996 and Floyd in 1999, swelled rivers and caused extensive flood damage there.

The researchers found that home prices fell a total of about 5% in federally designated flood zones compared to non-flood-zone areas after Fran and a total of 8% after Floyd three years later. Buyers and sellers were accounting for flood risk in county home prices—for a time.

But this risk perception “decayed rapidly,” says Landry. “It virtually disappeared four to five years after Floyd” as home prices in designated flood zones rose to match those outside flood zones. People apparently forgot the flood risk, didn’t know about the risk, or decided that it didn’t matter any more.

Most of us believe that we’re rational most of the time. Not so. We tend to overestimate our intelligence and skill, overestimate our chances for future health and welfare, underestimate our vulnerability to certain kinds of risk, and usually forget disaster experiences after several years.

“We are normally blind about our own blindness,” Kahneman has said. “We’re generally overconfident in our opinions and our impressions and judgments.”

The human brain works this way perhaps because life was so dangerous for our distant ancestors as they fought off predators and enemies. Perhaps optimistic, confident, risk-taking but capable individuals helped their kin-based groups survive in a hostile world in competition against similar groups for food and resources. Under evolutionary pressures, successful leaders and their family members could have been more likely to reproduce and pass on their genes.

Today’s entrepreneurs, artists, innovative scientists, and financial and political leaders are more likely to be “optimistic and overconfident, and to take more risks than they realize,” Kahneman has said.

Our culture’s leaders continually search for challenges and, if they fail once, they get up and rethink their strategy or look for a new objective. They have talent and luck but also persistence, tenacity, stamina, and nerve—personal qualities that the rest of us tend to admire and try to imitate.

Nudging or pushing

For decades, government agencies and nonprofit institutions have campaigned against risky behaviors such as smoking, abusing alcohol, and transmitting sexual diseases.

But public-education campaigns don’t quickly move people to action. That’s because they try to change how people think. We can’t easily change our brain’s hard-wired cognitive systems. A better strategy, some experts say, is to change how people behave.

Kahneman has said, “You’ve got to create situations so that [people will] make better decisions for themselves.”

He has expressed admiration for a 2006 federal law that improved retirement planning for some Americans. This law provides incentives for private companies to enroll all new employees in 401k retirement plans. Employees can choose at any time to opt out of a company-sponsored retirement plan, but enrollment is the default option. Their 401k contributions are tax-deductible, accumulations are tax-deferred, and employers often match part of their employees’ contributions.

In 2006, only a quarter of the nation’s large companies automatically enrolled employees in their 401k plans. But three-fifths did so by 2010, according to a study by Aon Hewitt, a global human-resources consulting company that surveyed 120 large companies and three million employees.

Auto-enrollment in 401k pensions, experts say, is partly responsible for higher rates of retirement saving by workers in those companies.

Today, the “nudge,” so gentle and unobtrusive, is one of the hottest ideas in policymaking, an outgrowth of research by Kahneman and other scientists.

In 2008, Richard H. Thaler and Cass R. Sunstein, two University of Chicago professors, published a best-selling book, Nudge: Improving Decisions About Health, Wealth, and Happiness, in which they outline a number of practical, inexpensive government measures to solve social and economic problems.

Today, schools, health-care providers, government planners, and private companies are quietly nudging individuals away from some decisions and toward others.

Those who nudge, in the words of Thaler and Sunstein, are “self-consciously attempting to move people in directions that will make their lives better.”

They call this process of nudging a form of “libertarian paternalism.”

Libertarian paternalists, for instance, might recommend that schools display fruit early and at eye level in cafeteria lines before students can see potato chips or chicken nuggets. Hungry students will grab more of the foods they notice first.

Perhaps nudges can help create better habits in our food consumption and many other activities. More than 40 percent of the actions we take each day are governed by ingrained, unthinking habits, not by conscious choices, according to Duke University researchers.

If a child is nudged repeatedly toward fruits instead of candy bars, this might create a beneficial habit.

Both ends of the political spectrum have taken up nudging in policymaking because it can be effective in some circumstances without intrusions into private behavior and personal choices. Thaler is now a consultant for British Prime Minister David Cameron, the leader of the Conservative Party, while Sunstein serves in a senior position in President Barack Obama’s administration.

Politicians like nudges, which allow people to make their own decisions. A nudge doesn’t take away an individual’s choice; it just encourages a person to make a better choice. Nudging is based on the principle that poor choices would still be available—but people would have to work a little harder to make those poor choices.

Policymakers might craft new rules that nudge property owners to hold hazard insurance for a longer period. Flood insurance policies could be attached to housing units rather than held by property owners themselves.

When a housing unit changes ownership, the new owner would automatically have responsibility for the flood policy. Also, each policy would be renewed every five years instead of every year, a small nudge to help people protect themselves from devastating financial losses.

Nudges are modest, gentle things—perhaps too modest and gentle in some cases.

What some coastal property owners really need is a firm push to prepare for hurricane winds, according to Smitty Harrison, executive director of the S.C. Wind and Hail Underwriting Association, commonly known as the “wind pool,” which provides affordable “last-resort” wind coverage for thousands of homes near the coast.

All standard property insurers regulated by South Carolina must participate in the wind pool, created in 1971. But the wind pool otherwise functions much like any other state-regulated private insurer in terms of issuing policies, charging premiums, and paying claims. Numerous states have created similar special-hazard pools in segments of the market that most private insurers regard as far too risky.

“We’re one of the few insurers to inspect the roofs annually,” says Harrison. “We hire a company with certified roof inspectors who get up on roofs and check them for deterioration. There are many positive things about the South Carolina coast, but it’s a terrible place for a roof. Sun, salt, wind, heat, and rain can just eat up a roof.”

Intense hurricane winds can rip plywood sheathing off a roof and then force past the structure’s “envelope,” where it increases air pressure inside the building. If enough pressure grows inside the structure, it will break apart at its weakest point, usually the roof.

That’s why a property owner must replace a deteriorated roof to acquire last-resort insurance coverage from South Carolina’s wind pool.

Says Harrison, “Our roof inspections are really pushing you to protect yourself, pushing you to replace your roof if it’s deteriorated and becomes the weakest part of the structure. This is for your benefit. If you have a 5% deductible on a $200,000 house, the first $10,000 of the loss will be yours.”

Research shows that you can help your neighbors by replacing your roof, and they can do the same for you. Builders in coastal areas of South Carolina are required by code to attach a home’s roof sheathing to rafters with additional nails, which reduces roof losses. When building materials fly off in high winds, they become dangerous airborne debris that can damage nearby homes.

Sea Grant researcher WeiChiang Pang, a civil engineer at Clemson University, says, “Your home will likely have less damage from flying debris during a hurricane if your neighbors have retrofitted their roofs or built new homes under current codes.”

But many coastal homeowners, especially newcomers, don’t realize how soon their roofs need replacing, according to Smitty Harrison. A roof near the ocean won’t last nearly as long as an inland roof.

Some developers and homebuilders have fought tougher codes and enforcement, which they say drive up home prices and reduce buyers’ choices. But over the long term stronger codes and enforcement can reduce disaster impacts and save homeowners money.

Standard insurers view strong building codes and enforcement as indicators of reliability in construction, so they tend to be more willing to issue new policies in those jurisdictions, according to Tim Reinhold, senior vice president of research and chief engineer at the Insurance Institute for Business and Home Safety.

When there are more standard insurers in a local market, there is more competition and potentially lower premiums.

We Americans have always been suspicious of restrictions on individual choices, even if those limits might protect us from harm. Our political system relies on choice, on the consent of the governed. A vote is a choice. Signing a petition is a choice. Joining an interest group is a choice. Our legal system is based in part on the principle that people make their own choices and must take responsibility for them.

Over the past several years, the country has engaged in numerous fierce debates about risk and choice. U.S. Supreme Court justices, members of Congress, and President Barack Obama have differing views about whether or not the federal government can require individuals to purchase health insurance to manage their health-care risks.

The reality is that understanding risk and choice will continue to be a difficult task because of our suscep­tibility to overconfidence and other cognitive errors.

Even scientists who study risk and choice struggle to apply what they have learned in experiments to their own daily lives. Kahneman reports that his own “intuitive thinking is just as prone to overconfidence [and other fallacies] as it was before [he] made a study of these issues.”

Even so, Kahneman writes, we should become more conscious of our brain’s illusions. We should remind ourselves again and again that we routinely underestimate risks and therefore misunderstand our choices. This is especially important to realize for those of us—half of the U.S. population—who have chosen to live in coastal areas, which are among the most dangerous locations on a dangerous planet.

Last updated: 11/26/2012 2:16:23 PM
Coastal Heritage – Summer 2012


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