will be years before we can estimate the costs-human and economic- , the devastating earthquake and tsunami that Japan suffered on 11 March. One thing is certain: the costs will be enormous. Millions of people are terrified at the northeast as the government strives to prevent a nuclear disaster. There are now more questions than answers. Three days after the earthquake, Knowledge @ Wharton interviewed Howard Kunreuther, professor of Public Policy and Business and Science of the decision, and Erwann Michel-Kerjan, director of the Center for Risk Management and Decision Processes Wharton, to assess the lessons that both corporate executives and experts in risk management should learn from the earthquake and its subsequent consequences.
Knowledge @ Wharton: You have been studying for years the events of low probability but high impact. These days it is covering the news of the earthquake in Japan. In the coming days and weeks we will have much more information about what has happened. Is there anything that catches their attention to the way they are covering this story? Howard Kunreuther
: There are two things I attract your attention. One is the magnitude and intensity of this event. It was the seventh in intensity of all earthquakes. The second is how well prepared he was Japan, in the sense that their building standards and other types of measures were in operation. And yet, given the magnitude of the disaster and its consequences in the form of tsunamis and the nuclear explosion, the devastation has been enormous. There will still be other consequences.
Erwann Michel-Kerjan: Could not agree more. If we were to evaluate the country from zero to ten countries in terms of readiness, Japan could have an eight or nine. In my opinion the U.S. would have a six or seven [and] not even going to bother to talk about some parts of Europe ... What we're seeing is the perfect combination of earthquakes, floods and melting of a nuclear reactor. This situation is truly overwhelming, and the death toll has only increased. It's just unbelievable.
Knowledge @ Wharton: When compared with, for example, the earthquake in Haiti, one of the things you observe any person who was watching the news is the differences in the construction of buildings. In Japan, building regulations are very strict. Does a country like the Japanese code?
Kunreuther: No. As far as earthquakes think Japan has the highest standards for very obvious reasons. Have experienced more earthquakes than any other developed country in the world. Know the dangers and have experienced several times. Michel-Kerjan
: The only country that, to some extent, could be compared with Japan is Chile. Last year was a great earthquake in Chile. It is not as rich as Japan, but the fact that Chile has suffered eight or nine earthquakes in the last 10 years makes him a "good student" among the countries likely to suffer and be prepared for the event, it could happen tomorrow same.
Knowledge @ Wharton: Looking at the information we have at the moment, do you detect any areas which were not adequately prepared?
Kunreuther: The interesting question is to define what we mean by "enough." To some extent, they are sufficiently prepared for virtually any type of earthquake ... except for the intensity of the sufferer. This brings up an interesting question that must be considered as a global society: How far will invest money in events very, very low probability? The homes and other structures could have been built better. Is partly related to income levels of people and where is the earthquake. But the intensity of it's hard to know if we could have done more than what was done. Michel-Kerjan
: I agree with Howard on this issue. It is too early to start casting blame on either side. We are still in shock. Wait a few days or weeks before you start considering what could have been done better.
Knowledge @ Wharton: Let us evaluate the general things that people have to do to prepare for these events. First is the low probability. How do you evaluate what is the probability of something happening, even if it is made more everyday? Does nearby bases in history?
Kunreuther: In the case of earthquakes we know it is an area prone to having accidents. In fact, these days there is much talk that the San Andreas Fault may be part of a series of possible earthquakes. Some seismologists predict that the probability of occurrence of an earthquake increases by the fact of having this. Both Erwann and I have worked on analysis of risks, but we are not in a position to explain what they have done to predict. His predictions are very unconventional. Michel-Kerjan
: Well, I must say that it is very difficult to predict an earthquake. The question is when it will occur. The "when" could be a very distant horizon. Fifty years in a period of one hundred is a long time for seismologists, not only for you and me as individuals, but also for earthquakes. In addition, I would add that even get a chance, say one in ten thousand, what does? How does this translate into reality? It is very difficult because the perceived risk in this case is even more important than the number you get.
Knowledge @ Wharton: We assume that nothing we are doing is affecting the risk of an earthquake, which depends on the tectonic plates and that we have nothing to do.
Kunreuther: It's like climate change.
Knowledge @ Wharton: There is talk of floods of a hundred years and all these things that seem to be happening with greater regularity. How do these events fit the frequency and history seem to be more volatile?
Kunreuther: There was a period, perhaps twenty or thirty years ago, when the earthquake prediction was part of the agenda. The Natural Science Foundation and other research institutions engaged in significant amounts of money to work in this area. Today we have the feeling that their ability to predict decreased. At most you get is to conduct studies for certain areas, such as Turkey, which predict that after the 1999 earthquake will have another one within 20 or 30 years. Seismologists do not know if now still so much confidence in those predictions as eight or ten years ago. But it is very, very strange to arrive at that conclusion. As Erwann commented, the question of when it will happen and where it is confusing and a challenge for the scientific profession. Michel-Kerjan
: In addition, increasingly are taking place more frequently, so with other things. For 10 years world population has increased by 1,000 million people and over the next 10 will be another 1,000 million. We're talking seven, eight billion people on this planet. And as the media coverage is now much better, we have pictures of what is happening in Japan for 24 hours a day, seven days a week. You can see the mess from your living room, so you can feel all the emotions much more.
last thing I would add is that more and more people living in high risk areas. The state of Florida is a good example. Its population increased something like 600% in the last 60 years. Part of the work that Howard and I have done for the book At War With the Weather (At War With the weather) examines these issues in detail. Even before talk of change climate, we evaluate how many people are living in high risk areas. Are they adequately protected? The answer is no. The economic and social consequences could be severe.
Knowledge @ Wharton: Anywhere in the world shows that people often live in the coastal zone. The most densely populated areas are found where water and transport. Which brings us to the next question, related to costs. Obviously there are human costs, but these events are also financial costs, which often vary. How could assess the costs if someone were interested in finding a balance between risks and costs?
Kunreuther: This is one of the greatest challenges in this area. There are direct costs and those costs are now being pointed, costs in lives. Information on the number of people who have died or damage to buildings has been changing every hour. But there is a huge cost related to business interruption and a lot of interdependencies. Take the example of Toyota. They are trying to figure out what will happen to the company in Japan itself, and why his works did not suffer much damage to be located quite far from the earthquake. But depend on suppliers. And there are many problems in the supply chain. Yet know the severity of damage in transport and infrastructure, which can cause huge problems. We fear to watch all these things by adopting a perspective of long-term. We can not just say now that the cost will be X. It's about time that we understand completely and indirect costs. Michel-Kerjan
: Perhaps the probability is very low, but we are well prepared in case something similar happen tomorrow? If I were Google I would ask what is the probability of an earthquake in Silicon Valley tomorrow, "Would you be prepared? Do I have insurance for it? Do I have financial protection? "The earthquake in Japan may be one of the most expensive since the earthquake California at Northridge in 1994. We're talking about a great event.
Kunreuther: Another thing I would add, still do not know the risk of radioactive leakage. The cost in case of a meltdown could be huge ... or if it happened in a wider area. In my class today about the risk of a question arose when we were talking about this: What will happen to nuclear power as a result of all this. There is a picture about the safety of nuclear power, even though the Japanese have done everything possible to ensure that these plants are very safe. Compared to Chernobyl are much safer. However, the general perception nuclear energy could change as a result of this disaster.
Knowledge @ Wharton: One thing that seems clear is that nuclear power has been escalating positions of respectability. Even environmentalists say "Maybe it's better than some alternatives based on fossil fuels." All this discussion again. Michel-Kerjan
: It is much more than that. Now people are really evaluating the alternatives. A good example is here in Pennsylvania, in 1979 nuclear accident at Three Mile Island. Nothing happened in terms of millions of victims. It was an accident. But the perception that nuclear energy had changed always, at least in this country. And that was more than 30 years. Coming from France, where companies such as Areva nuclear energy sold to China, Brazil and other countries have been at the forefront of the battle. Is a growing sector, and no doubt are thinking about the future of their business model.
Knowledge @ Wharton: I do not know whether this matter falls somewhat outside their area of \u200b\u200bexpertise, but nuclear power plants in Japan are quite old, between 30 and 40 years, I think ... Do you know if the current technology is much safer than 40 years ago? Michel-Kerjan
: That's true for nuclear power and virtually all things. Technology is improving every day. However, given the magnitude of this earthquake, I doubt that a new nuclear reactor would have behaved better than the one built for ten, maybe thirty years, as is the case in Japan. The quality of construction would be better but we're talking about a devastating ...
Kunreuther: Something that has been discussed these days is that plants in Japan are much better designed than Chernobyl, and that at bottom it is still a hope . As we speak they are trying by all means avoid a meltdown with seawater. But the design of the plant could still contain a significant portion of the radiation, which at Chernobyl did not happen. It is this context is definitely a much safer central. Now, if we could do better or not is something that as Erwann commented, it will be known later. It will be interesting to see what the experts say about the design of plants able to withstand earthquake-prone areas.
The other comment I would make ... is that apparently this plant is located on a fault. I wonder if they would consider the consequences of placing a plant on a fault. I guess so. However, we are discussing if the plant is placed in the right place.
Knowledge @ Wharton: One thing is say "Yes, we know more or less the frequency with which earthquakes occur and calculate the probability." But in this case, one thing that seems to have gone wrong is that the emergency diesel generators were installed below the likely level of flooding if sea broke barriers. Obviously now seems an obvious error. But when you do a risk assessment, to what extent should deal with seemingly minor details that could be underestimated but nevertheless have devastating effects?
Kunreuther: These details are taken into account constantly. All risk assessor is often said that doing the best he can with the knowledge you have. If an earthquake the best example is Kobe, who suffered much damage in the earthquake of 90. It was not that the buildings were poorly designed, but simply to suffer the earthquake did not know they could not resist that particular shock. Ignored him. The same thing happened in California in connection with Northridge. Thought that new designs were very secure, and they were not. Michel-Kerjan
: Regarding nuclear power I would point out that this is not only in Japan. The whole international community is watching what is happening, particularly the International Atomic Energy Agency, which is the international organization that evaluates these issues. For the life chances of the current CEO is Japanese, Mr Yukiya Amano. This will help in the relations between the Japanese authorities and the international community. This is good news worldwide.
Knowledge @ Wharton: This event is a real wake-up call, people have to make a better assessment of risks and think more about events of low probability but high impact. Suppose you are CEO of a large corporation and realize that your company is not doing. Where do I begin? Michel-Kerjan
: First, do not think it's a wake up call. We have had many calls attention in recent days and years. Now we come every three months. A few weeks ago there was an earthquake in New Zealand, major floods in Australia earlier this year and earthquakes in Haiti and Chile last year. Keep coming. If you are CEO hopefully you've started to think about these issues. So far we have seen is that, compared with the last three, four or five years, there are more boards that incorporate these issues in their agenda. The change is radical.
Where to begin? That's what we're doing at the Wharton Risk Center. We have been doing for 28 years ... There are ways to manage these issues and do it properly.
Knowledge @ Wharton: A CEO, should go to an expert outside the company who knows how to do it or is it something that can be created within the company? Michel-Kerjan
: Normally you have to do both. You know what you want. You have limited resources and want to resolve these issues. But you need an expert from outside the company to help you get it, and we know how. The question is, are you ready to start?
Kunreuther: If I had to pose a challenge to all CEOs, a challenge on which we have meditated on the Risk Center in our research and interactions with companies, that would be how corporations can think long term. How can design strategies to address the immediate risks but also long-term strategies? There is a tendency to forget and a tendency to think after a while we're fine. I'm not saying that corporations are completely forget. The real challenge is that we need to have things that provide stability to the company in place.
Knowledge @ Wharton: I guess it's also a matter of incentives. If we look at the financial crisis a few years ago, one of the most surprising things is why the people who ran these large companies were taking risks that could wipe them out. One answer is that many of these people could make money very quickly and just playing, so that the future did not care much. I get the impression that there is always some tension between the immediate results and long-term planning, especially in regard to spending money. What do you think are the main obstacles to better disaster planning in corporations and government?
Kunreuther: Just hit the mark. The challenge is to provide short-term incentives to convince businesses that they should plan for the long term. Both are necessary. If you think all you need is a long-term without incentives, it will not work for the reasons previously stated. We have to work on the line to give something back next year, but at the same time recognizing that it is a multiyear process. Michel-Kerjan
: Returning to your question about the financial crisis. If the salary or bonus you receive every five years, depending on the behavior of its customer base in those years, I am convinced that it would take completely different decisions rather than simply trying to game the system, as has happened.
It's the same with earthquakes, as well as for floods and hurricanes. Could expand the horizon? If we can reach a situation where many people earn.
Kunreuther: Let me plant a small experiment for people to reflect. If you told that there is a particular individual of one in a hundred chance that an earthquake or a flood next year and to be secured, I believe, based on previous experiments, not many people would buy an insurance.
What you think is "one of 100 is below my level of concern. I will not worry. " But if you tell a person that there is a risk greater than one on five of suffering at least one earthquake or flood in the next 25 years, many would think differently. But these two probabilities are exactly identical. Everything we've done as Erwann suggested, is to extend the time horizon. We are simply extending the time horizon and giving the same number but using a different dimension. One out of five is a probability high enough to make people think more about the subject. One in a hundred is too small.
Knowledge @ Wharton: When we think in terms of disasters, our minds immediately think of those directly affected, the people in firms in these areas. Here we are in Pennsylvania, thousands of miles separate us from Japan, but still the earthquake could affect many ways. There are immediate effects on trade that could affect us. I've heard some speculation that Japanese consumers could retract its use as a general reaction to stress and buy fewer products. Many people and companies that are not directly in the disaster zone will be affected in some way. How can a business man or woman to assess the primary and secondary effects from the other side of the world?
Kunreuther: I ask the same question in terms of what will be the consequences for me, for my corporation. That's the main question. Then, what are the implications of an earthquake in Japan? Where are our sources of supply? Will our business be affected?
There are several questions in our interdependent and interconnected world that any business would ask. That is what is happening today. In all countries of the world people are asking similar things. The second issue I would like to stress, and it's obvious, it is our compassion, we feel that we're in this together, we have to help motivated not only economic but social. We know that everyone is now worried about Japan.
Knowledge @ Wharton: Looking at the interactions and how interconnected the world is today, I guess plan a disaster is not something you have stored in your mind there and that someday you will. It's something you have to check constantly as conditions change. Michel-Kerjan
: It's an interesting point. But it is much more because we are living in an increasingly small planet. For me I need preparation involves preparing internally and make sure my employees are ready, but also externally with my suppliers and legal systems outside my country so we are talking about encompass the whole planet earth. It is a radical change. It is another aspect of globalization. The risks are also becoming more global. We must be prepared at a global level.
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