The world has become fragile

The world has become fragile March 18, 2011

Steven Pearlstein reflects on our recent disasters, all of which took us by surprise and none of which we were prepared for:

In just the past decade, we’ve had the attacks of Sept. 11, the tsunami in the Indian Ocean, Hurricane Katrina, the global financial crisis, a global flu pandemic, the earthquake in Haiti, the oil spill in the Gulf of Mexico, and devastating floods in Australia and New Zealand. Now, Japan has been hit with a triple whammy of earthquake, tsunami and nuclear crisis.

What all of these have in common is that they are all low-probability, high-impact events — the “long-tail” phenomenon, to use the jargon of risk modelers, referring to the far ends of the traditional bell curve of probabilities, or “black swans,” to use the metaphor popularized by former Wall Street trader Nassim Nicholas Taleb.

Such calamitous events have been a regular part of the human experience since Noah and the flood, some of them natural, others manmade. In spite of that, however, we continue to underestimate their frequency and severity.

To a degree, that is a good thing. If we were to focus too much of our attention on all the really, really bad things that could befall us, we’d never get out of bed in the morning.

But the same psychological trait that allows us to go about our daily business also creates blind spots. Although we observe that calamities happen, we assume that they won’t happen to us, or they won’t happen again. And if it has been a long time since the calamity, we are apt to take false comfort that we have beaten the odds. . . .

Part of the problem is that we don’t know what we don’t know. The other part is that small miscalculations of probabilities can have large effects on outcomes when dealing with long periods of time. Think of the sailor who sets off on a voyage a few degrees off course. A few miles out, the error is small, but by the time he crosses the ocean, he may find himself hundreds of miles from the intended destination.

Our reward structures don’t encourage spending the time or the money to deal with low-probability disasters. The chief executive of Citigroup acknowledged as much when he told a reporter in 2007 that he would lose his job if he gave up profit and market share to shield his bank from the obviously excessive risk-taking that everyone knew was going on. And you can only imagine the outcry from the industry and those Gulf Coast politicians if government regulators back in 2009 had ordered oil companies to spend millions of dollars to have enough boats and booms at the ready to deal with a BP-sized oil spill from deepwater drilling.

Indeed, it seems that when we conclude that the chance of something really bad happening is very small, we wind up taking actions that either increase the probability of the disaster or the damage that it will cause. Once the rocket scientists on Wall Street, for example, concluded that it was virtually impossible for investors in so-called “mezzanine” tranches of mortgage-backed securities to lose money, it set off a chain of events that made the prediction untrue. The heavy demand for the securities led to dramatically lower lending standards and a sharp increase in housing prices, creating a bubble so large that when it burst, it caused heavy losses for those same mezzanine investors. The declaration that a particular investment was riskless became a self-negating prophecy.

Similarly, when the government builds a levee, it may reduce the frequency of damaging floods but may also encourage even more people to build homes and businesses behind the barrier. When the Big One finally arrives, the total damage will be even greater than if no levee had been built.

We’re also discovering that the impact of disasters is magnified by globalization. The troubles in northern Japan, for example, are beginning to ripple through global supply chains, creating bottlenecks and shortages in dozens of industries. The way globalization increases economic efficiency is by leveraging the advantages of scale and specialization. Yet the bigger and more concentrated production becomes, the more vulnerable it becomes to disruption.

Many scholars now think that the very complexity of modern life — including our transportation and communication systems, our economy and our social interactions — is directly implicated in the severity of catastrophes. In more complex systems, even small changes or perturbations can have disproportionate and unpredictable effects. The things that make our systems more efficient also make them more effective in spreading the impact of a catastrophe.

via Lessons from the long tail of improbable disaster – The Washington Post.

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  • Matthew Surburg

    It may be true that specialization increases vulnerability to a degree, but that same degree of specialization also enables an enormously higher standard of living overall, which is itself protection against a high-impact event. As Walter Williams is fond of saying, the cure for poverty is wealth.

    As an example, according to http://hubpages.com/hub/Haiti-Earthquake-Facts, the earthquake in Haiti in January 2010 killed 200,000 people and left another 2 million homeless. Granted that the epicenter was only 15 miles from Port-au-Prince, we are still taking about an event 100 times less strong than what hit Japan – and no tsunami. 10,000 dead in Japan is horrible, but it could have been so much worse. Why wasn’t it? Among other things, Japan, being wealthier, was more able to be prepared, with buildings designed to withstand earthquakes and coastal tsunami warnings which did save tens of thousands of lives. In Haiti, building which were made from cinder blocks and nothing else collapsed, killing everyone inside. With no infrastructure to speak of (roads, hospitals, emergency services, effective communication), the people of Haiti had no way to recover or rebuild.

  • Matthew Surburg

    It may be true that specialization increases vulnerability to a degree, but that same degree of specialization also enables an enormously higher standard of living overall, which is itself protection against a high-impact event. As Walter Williams is fond of saying, the cure for poverty is wealth.

    As an example, according to http://hubpages.com/hub/Haiti-Earthquake-Facts, the earthquake in Haiti in January 2010 killed 200,000 people and left another 2 million homeless. Granted that the epicenter was only 15 miles from Port-au-Prince, we are still taking about an event 100 times less strong than what hit Japan – and no tsunami. 10,000 dead in Japan is horrible, but it could have been so much worse. Why wasn’t it? Among other things, Japan, being wealthier, was more able to be prepared, with buildings designed to withstand earthquakes and coastal tsunami warnings which did save tens of thousands of lives. In Haiti, building which were made from cinder blocks and nothing else collapsed, killing everyone inside. With no infrastructure to speak of (roads, hospitals, emergency services, effective communication), the people of Haiti had no way to recover or rebuild.

  • nqb

    The Onion had a very good article yesterday about unforeseen disasters.

  • nqb

    The Onion had a very good article yesterday about unforeseen disasters.

  • Tom Hering

    Let’s be unafraid to come out and say it – it’s all the result of covert weather/earthquake warfare, involving H.A.A.R.P. and chemtrails and UFOs. Waged for economic reasons by a global alien/capitalist conspiracy. Just search the internet and you’ll see it’s true!!!

  • Tom Hering

    Let’s be unafraid to come out and say it – it’s all the result of covert weather/earthquake warfare, involving H.A.A.R.P. and chemtrails and UFOs. Waged for economic reasons by a global alien/capitalist conspiracy. Just search the internet and you’ll see it’s true!!!

  • WebMonk

    Standard news headline sensationalism. Notice it is all opinion by the columnist with the supporting facts not drawn in any sort of systematic fashion, but rather gathered willy-nilly from wherever a factoid can be found that might be appropriated to support the columnist’s view.

    Using that exact same approach you can just as easily come to the exact opposite conclusion. Whatever.

  • WebMonk

    Standard news headline sensationalism. Notice it is all opinion by the columnist with the supporting facts not drawn in any sort of systematic fashion, but rather gathered willy-nilly from wherever a factoid can be found that might be appropriated to support the columnist’s view.

    Using that exact same approach you can just as easily come to the exact opposite conclusion. Whatever.

  • Has the world become fragile, or are we providing incentives to do stupid things? When I flew to Asia a few years ago, one thing I noted as the plane descended to Narita was that I was going through a rice-growing region that had obviously been built on reclaimed land in an island archepelago. Many of these villages were hit the hardest by the tsunami, just like we’re paying for new luxury houses on the Gulf Coast after every hurricane because Uncle Sam pays a large portion of the insurance.

  • Has the world become fragile, or are we providing incentives to do stupid things? When I flew to Asia a few years ago, one thing I noted as the plane descended to Narita was that I was going through a rice-growing region that had obviously been built on reclaimed land in an island archepelago. Many of these villages were hit the hardest by the tsunami, just like we’re paying for new luxury houses on the Gulf Coast after every hurricane because Uncle Sam pays a large portion of the insurance.

  • Nope. (1) We are aware of everything everywhere almost instantly. As short as 20 years ago, this kind of information transfer was impossible. (2) There are a lot more people to be affected by disaster than there have ever been before – and population is growing exponentially.

  • Nope. (1) We are aware of everything everywhere almost instantly. As short as 20 years ago, this kind of information transfer was impossible. (2) There are a lot more people to be affected by disaster than there have ever been before – and population is growing exponentially.

  • Louis

    Webmonk (and John) is quite right. It is sensationalism, not fact. By chance I was watching a documentary last night, which noted that the Minoan civilization, the most advanced on the planet for it’s time, was essentially ended by a single natural event, the Santorini eruption, which destroyed their prime trading post, and the ensuing tsunami, which sank their fleet.

    But here is the other thing which is quite true. There isn’t any speculation about the news, the speculation IS the news. As such, I’d steer clear of this kind of statement….

  • Louis

    Webmonk (and John) is quite right. It is sensationalism, not fact. By chance I was watching a documentary last night, which noted that the Minoan civilization, the most advanced on the planet for it’s time, was essentially ended by a single natural event, the Santorini eruption, which destroyed their prime trading post, and the ensuing tsunami, which sank their fleet.

    But here is the other thing which is quite true. There isn’t any speculation about the news, the speculation IS the news. As such, I’d steer clear of this kind of statement….

  • helen

    Bike Bubba @ 5
    we’re paying for new luxury houses on the Gulf Coast after every hurricane because Uncle Sam pays a large portion of the insurance.

    Second/vacation homes [also 3-infinity] should not be eligible for mortgage deduction or subsidized federal insurance schemes.
    Then people would own what they could afford to lose on the shore, and the environment would benefit thereby.

  • helen

    Bike Bubba @ 5
    we’re paying for new luxury houses on the Gulf Coast after every hurricane because Uncle Sam pays a large portion of the insurance.

    Second/vacation homes [also 3-infinity] should not be eligible for mortgage deduction or subsidized federal insurance schemes.
    Then people would own what they could afford to lose on the shore, and the environment would benefit thereby.