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Power Down - Wharton Risk Management and Decision Processes Center

February 12, 2016

When it comes to tackling climate change, understanding the risks involved is hugely important. But how do we incorporate these risks into tangible solutions? We talked to the Wharton Risk Management and Decision Processes Center’s Founder and Co-Director, Dr. Howard Kunreuther, to learn more.

 

Green Campus Partnership: What is the Risk Center and what is its purpose?

Howard Kunreuther: The Risk Center, which had its 30th anniversary this past October, focuses on how we deal with low probability high consequence events. In particular, we are interested in how decisions are made by individuals, firms countries, public and private sector organizations in the United States  as well as at a global level. That’s why “decision processes” appears in the title of the Risk Center. Recently, climate change has been one of the areas we’re dealing with. We strive to understand how risks are assessed, how they are perceived by different interested parties and then use these ingredients to help create better policy options and improve the risk management process.

 

GCP: What types of research and partnerships does the Risk Center take part in?

Kunreuther: The Risk Center relies on faculty, post-docs and students from Wharton and other schools at Penn to undertake research. We have partnerships with other universities and reach out to private and public sector organizations in the U.S. and internationally.  Our research examines specific risk-related problems. Recently we have focused on natural hazards, particularly challenges related to how we deal with floods. Our research in this area is closely tied to climate change given the impact that sea level rise may have on future flood-related damage to property and the environment. We also undertake research on other issues such as insuring against losses from terrorism and ways that firms can take steps to reduce the risks associated with technological accidents. The Wharton Risk Center annual newsletter provides detailed information on our current research portfolio.

 

GCP: What type of research has the Risk Center done in relation to energy?

Kunreuther: We have undertaken studies on ways to induce individuals to invest in energy efficient technologies, such as solar panels for their homes. What role will framing messages in different ways coupled with economic incentives play in creating interest in environmentally efficient processes given people’s behavioral biases? How can you get people to appreciate the long-term significance of investing in these technologies when they are discouraged by taking these steps because they have 1) never done it before, 2) there are high upfront costs and 3) there is a tendency to focus on the short-term benefits which are often dwarfed by the initial expenditures?

 

GCP: Keeping that in mind what do you think is the biggest challenge to reducing energy consumption at Penn?

Kunreuther: I think it’s highly important for students and faculty to understand how much energy they currently use and to recognize that there are steps they can easily take to reduce their energy consumption reduction that aren’t that expensive. Switching from standard bulbs to LEDs [or CFLs] and turning off lights and appliances when not in use are two simple things people could do. Even for simple remedies it is very hard to give anyone advice that they will take to heart. There are so many perspectives to keep in mind when one crafts a message. Liberals view the energy problem different from conservatives.  Owning a home is very different from renting or if you live in a college dorm.  Figuring out how to take account these different perspectives is a challenge. 

 

GCP: What’s the future of risk management?

Kunreuther: We believe that the biggest challenges we face today are how to get people to pay attention to long-term strategies that protect against risks like climate change. What people do today might be very effective 20-30 years from now. But it’s very hard for many individuals or families to adopt these long-term measures because they are costly today and the benefits accrue over many years. To overcome these budget constraints and myopic tendencies, we need to develop short-term economic incentives. For instance, many people currently can’t afford to invest in solar, even though they might want to. Solar companies California have found one way to deal with this problem by incurring the upfront cost of the solar panels and the installation expense. The homeowner then pays these costs back via a long-term loan tied to the property. The cost savings from using solar coupled with additional funds obtained from selling energy stored in the panels back to the utilities normally more than covers the annual cost of these loans.  A similar strategy could be used in flood-prone areas by providing loans to homeowners for adaptation measures such as flood proofing or elevating their property where the cost of the loans are less than the reduction in flood insurance costs if premiums were risk-based. By giving people short-term incentives to overcome their reluctance to invest in these measures, their property will be more efficient and safer over the next 30 years. We will also be helping future generations− our children and grandchildren− in the process.

GCP: Finally, the Risk Center and Penn Law are hosting an event on February 16th. Can you tell us a little more about it?

Kunreuther: We will be hosting Dale Jamieson and Jennifer Jacquet, both professors of environmental studies at NYU  as part of Penn’s Risk Regulation Seminar series.  They will be presenting on the topic ““Living with Climate Change: Will Paris Make a Difference?” Jamieson and Jacquet will explore the importance of society and corporations active involvement to ensure the success of the recent climate agreements reached by the Conference of the Parties (COP21) in Paris.

 

Learn more about this event at https://www.law.upenn.edu/newsevents/calendar.php#event_id/51842/view/event.

Image Copyright: Wharton Risk Center

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