We know that there is always a "silver lining" of disasters. At a minimum, new government jobs are created as the public demands "action" and somebody must co-ordinate the rebuilding efforts. Whether the shock is the Moscow Heat Wave of 2010, 2005 Katrina or 2011 Northern Japan, how much do we update our prior beliefs in response to a very salient shock? Permit me to offer some quotes from this article.
"We can only work on precedent, and there was no precedent,” said Tsuneo Futami, a former Tokyo Electric nuclear engineer who was the director of Fukushima Daiichi in the late 1990s. “When I headed the plant, the thought of a tsunami never crossed my mind.”
This is a fascinating quote. Mr. Daiichi is implicitly saying that based on his sampling of history that the probability of a Tsunami affecting his power plant was 0%. This sounds a little like Wall Street in 2008. In that case, what was the probability that all U.S local housing markets declined in value at the same time? It had never happened before so it couldn't happen.
For those who care about adapting to climate change, this is fascinating stuff. Climate change is likely to raise the probability of very unlikely nasty events. If these events used to be a 1 in ten million chance of taking place and now they are a 1 in 100,000 chance of taking place, then there will be protective investments that will pass a "cost/benefit" test that could be invested in.
"For some experts, the underestimate of the tsunami threat at Fukushima is frustratingly reminiscent of the earthquake — this time with no tsunami — in July 2007 that struck Kashiwazaki, a Tokyo Electric nuclear plant on Japan’s western coast.. The ground at Kashiwazaki shook as much as two and a half times the maximum intensity envisioned in the plant’s design, prompting upgrades at the plant.
“They had years to prepare at that point, after Kashiwazaki, and I am seeing the same thing at Fukushima,” said Peter Yanev, an expert in seismic risk assessment based in California, who has studied Fukushima for the United States Nuclear Regulatory Commission and the Energy Department.
There is no doubt that when Fukushima was designed, seismology and its intersection with the structural engineering of nuclear power plants was in its infancy, said Hiroyuki Aoyama, 78, an expert on the quake resistance of nuclear plants who has served on Japanese government panels. Engineers employed a lot of guesswork, adopting a standard that structures inside nuclear plants should have three times the quake resistance of general buildings."
So, in the aftermath of a disaster --- how do risk regulators recalibrate their subjective risk assessments? Do they tend to "over-react"?
The adaptive process involves both government self-protection investments and private sector investments. Will people choose to live close to such plants and in such coastal locations? What materials will they build their homes out of as they rebuild? The media is reporting that concrete homes in the Tsunami zone survived the disaster with much less damage than wood homes. How will this lesson affect the rebuilding effort?
Returning to climate change adaptation, the key issue here is subjective risk assessment. For voters and day to day citizens, do salient disasters shock people into changing their lifestyles so that they are protected from the next disaster? In the case of the Moscow Heat Wave of 2010, I am sure that this will stimulate air conditioner sales so that next summer's Moscow Heat will cause much less suffering. Does this optimism hold more broadly? Or are we doomed to make the same mistakes over and over again because we do not learn?
Economists are sure that people do learn from their mistakes and increased fat tail risk offers a fascinating test of this optimism. In my 2010 book Climatopolis, I present a "Chicago" free markets and rational expectations case that our entrepreneurs and our insurance industry have incentives to think ahead and anticipate fat tail risk. This risk creates opportunities and challenges for them. I talk in the book about the behavioral economics world view and its implications for anticipating our ability to adapt to climate change. Now, this doesn't mean that we have "perfect information". Instead, rational households and firms recognize that they face a moving target and "know that they don't know" the likelihood of future states of the world. Anticipating this ambiguity, there are actions they can take today to protect themselves that are likely to be cost-effective. Companies that can figure out new products that reduce risk exposure are likely to become rich in our hotter future.