Insuring against disaster

Howard Kunreuther of the Wharton School has a new whitepaper on insuring against natural disaster risk. One of the things he points out, though it’s not new, is the how risk is perceived can change response:

Studies have shown that even just multiplying the single-year risk so the numerator is larger—presenting it as 10-in-1,000 or 100-in-10,000 instead of 1-in-100—makes it more likely that people will pay attention to the event [Slovic, Monahan, and MacGregor (2000)].

Keep in mind, 100/10000 is the same as 1/100, but people are more likely to prepare for the disaster with likelihood of 100/10000. Kunreuther argues this is a key part of the “choice architecture” in risk management. He’s probably right.

Image by Sparkle Motion / Flickr.