[Shah Family Fund Distinguished Lecture] "Reducing Losses from Catastrophic Risks: The Role of a Behavioral Risk Audit"

This talk highlights factors that lead individuals not to protect themselves against low-probability high-consequence events until it is too late. How can risk assessment and risk perception be useful inputs for developing implementable risk management strategies to reduce future losses? To highlight the role that the public and private sectors can play in addressing this challenge, I will focus on the earthquake and wildfire hazards that property owners face in California and other parts of the country. The errors that individuals exhibit in deciding not to purchase insurance or invest in loss reduction measures prior to a disaster can be traced to the effects of six decision biases: myopia, amnesia, optimism, inertia, simplification and herding. A behavioral risk audit can incentivize property owners in hazard-prone areas to take steps now to reduce their future disaster losses.