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Emerging Risks for Business from
Trends in Attitudes and Regulations
Prof. Rajeev Gowda
Indian Institute of ManagementBangalore
February 27, 2012
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Psychological Perspectives on Risk
Perception
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Lay people overestimate rare events &underestimate frequent events
Relationship between judged frequency & actual number of deaths/year (Lichtenstein et al., 1978)4
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What Affects Risk Perception
The opinions and actions of friends, family, co-workers, and respected public
officials all contribute to perception of risk
Other causes of misperception of risk include the source of the risk information,
the credibility of the source of the information and the psychological
interpretation of risk information. The vast majority of the public rely on the media for their information on risk and
yet this is admitted by the public to be the least credible source of information.
The perceived credibility of expert sources influences to a great extent how the
information is received.
To cope with the vast amount of information, people often rely on inferentialpsychological rules to cope with uncertainty and to reduce difficult mental tasks
to simpler ones. Although valid under certain circumstances, use of these
processes in assessment of risk can lead to serious and persistent biases.
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Interpreting Psychometric Studies
People are not irrational
People care about qualitative aspects of risk:
Unfamiliarity
Dread
Number of people exposed
Risk perceptions are expressions of peoples values and
cannot be rejected as irrational
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Outrage Factors*
HIGH OUTRAGE LOW OUTRAGEInvoluntary Voluntary
Artificial/Industrial NaturalExotic Familiar
Hard to understand Well understood/self-explanatory
Memorable Not memorable
Dreaded Not dreaded
Potentially catastrophic Diffuse in time & space
Not reversible reversible
Unknowable / Uncertainty Knowable / Well-known
Delayed effects Immediate effects
* Courtesy of Peter Sandman and Vincent Covello, with interpretation by Mary McDaniel, and Barry Connell.
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Outrage Factors (continued)
HIGH OUTRAGE LOW OUTRAGEAffecting children (and mothers) Not affecting children
Affecting future generations Not affecting future generationsIdentifiable victim(s) Statistical victim(s)
Personal stake No personal stake
Controlled by system or others Controlled by individual
Unfair Fair
Morally / ethically objectionable Morally / ethically neutral
Associated with untrustworthy Associated with trustworthy
History of major accidents Little or no such history
Closed process Open process
More media attention Less media attention
No visible (or diffuse) benefits Visible benefits
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Social Amplification of Risk
Social dynamics influence how risk events are represented and
communicated.
Risk events have a signal value that is propagated through a social network.
Eventcharacteristics
Type of impact(company level)
E
Ec1Ec2Ec3...
Ecn
Interpretation of
E----------------------
Signal
Victims
CompanyIndustry
Other technologies
Event Interpretation Spread of impact
Stigma
Loss of salesRegulatoryconstraints
Litigation
Communityopposition
Investor flight
Source: Kasperson, R.E., Ortwin, R.,Slovic, P., Brown, H., Emel, J., Goble, R.L.,Kasperson, J.X., & Ratick, S.J. (1988). Thesocial amplification of risk: A conceptualframework. Risk Analysis, 8(2), 177-187.
Special Reference:
Stigma and the Social Amplification of Risk: Toward a Frameworkfor Analysis. A chapter from Risk, Media, and Stigma. J. Flynn, P.Slovic, H. Kunreuther (Eds.)
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Risk is Amplified When
A new and possibly catastrophic risk has emerged
The managers try to conceal the risks: they cannot be trusted
The risk managers are not in control of the hazard
The experts do not understand the risks or do not understandthe long-term cumulative effects of chemicals
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Worldviews: Implications for Risk Attitudes
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Risk & Culture: Implications for Environmental
Conflict
Douglas & Wildavsky: People select certain risks forattention and disregard others in a way that reflectsand reinforces the particular worldviews to whichthey adhere.
Egalitarians are sensitive to environmental risk. To reducerisk, they feel it is justifiable to regulate commercialactivities that cause social inequality.
Individualists dismiss claims of environmental risk asspecious, in line with their commitment to the autonomy of
markets. Hierarchists, perceive warnings of environmental
catastrophe as threatening the competence of social andgovernmental elites.
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Douglas and Wildavsky
On its surface, conflict over environmentalregulation focuses on competing empirical
claims of threats and dangers. Butbecause the positions people take reflectand reinforce their cultural worldviews,disputes over environmental risks are in
essence the product of an ongoing debateabout the ideal society.
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More on Worldviews
Egalitarians Live in voluntary associations where everyone is equal; good of group comes
before that of individual. See nature as fragile.
Hierarchists
Society has a well-defined role for each member, (like caste?). Believe in asystem of rules, and fear social deviance (eg crime) that disrupts those rules.See nature as "perverse/tolerant which can be exploited within limits; ifexceeded the system will collapse. Rely heavily on experts to identify thoselimits.
Individualists Their choices are unconstrained by society. They value individual initiative inthe marketplace, and fear threats like war that would hamper free exchange.Their view of nature is described as cornucopian or resilient.
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Interdependency: Barry Schwartz:
Each way of life undermines itself. Individualism would mean chaos
without hierarchical authority to enforce contracts and repel enemies.
To get work done and settle disputes the egalitarian order needs
hierarchy, too. Hierarchies, in turn, would be stagnant without the
creative energy of individualism, uncohesive without the binding force
of equality, unstable without the passivity and acquiescence of fatalism.
Dominant and subordinate ways of life thus exist in alliance yet this
relationship is fragile, constantly shifting, constantly generating a
societal environment conducive to change. It is therefore important that all the ways of life be taken some sort of
account of in the policy process
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Implications for the Climate Change
Debate
The current positions in the debate on climate change can be
read as threepolicy stories (three, because the fatalist solidarity
has no voice; if it had it would not be fatalistic).
Each policy story provides a setting (the basic assumptions), a
villain (the policy problem), heroes (policy protagonists), and, of
course, a moral (the policy solution). Each story emphasizes
different aspects of the climate change issue. What is more, each
story defines itself in contradistinction to the other policy stories.
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The Egalitarian Story on Climate Change:
Profligacy Setting/Assumptions:
Nature is fragile; environment on brink of precipice
Humans not above nature; integral part of Earth ecosystem
Villain/Policy Problem: Inequitable economic systemprofit and growth compulsionslead to unsustainable production
and consumption Human treatment of the environment is part of a larger social malaisehow we treat weaker
members of society
Heroes: organizations/networks of protest (e.g., Earth First!)
Moral/Policy Solutions: Drastic cuts in carbon dioxide emissions
Industrialized North produces most emissions; hence must bear costs
Reform political institutions and unsustainable life-styles.
Rather than professionalized bureaucracies and huge centralized administrations, decentralizedecision-making down to the grassroots level.
Conserve the fragile natural resources: move away from a waste society
What are real human needs? Simple, they are the needs of Planet Earth.
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The Hierarchical Story on Climate Change:
Failure of Global Planning Setting/Assumptions:
Population and economic growth have environmental limits
Irresponsible use of fossil fuels will destroy ecosystem
Enough time is left to plan a gradual, incremental change towards technologies and energyresources that do not emit greenhouse gases
Villain/Policy Problem: Tragedy of the Global Commons; lack of global governance mechanisms
Heroes: Dispassionate scientists, experts, civil servants, NGO representatives and enlightened politicians
who are building the global bureaucratic structures that will rectify global markets, and usher inthe non-carbon age gradually
Moral/Policy Solutions: Solution to global issues (such as climate change, biodiversity or international terrorism) must
consist of global intergovernmental treaties, based on scientific planning and expert advice
Need stronger UN system, global central bank, world investment trust with redistributivefunctions and transfer mechanism, world environment agency, revised fairer World TradeOrganization with expanded mandate.
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The Individualist Story on Climate Change:
Much Ado About Nothing Setting/Assumptions
Wonderfully robust and bountiful natural world
Diagnosis of climate change incorrect; consequences not catastrophic
Lacunae in climate sciencemodels flawed, natures impacts are more
Villain/Policy Problem
Scare-mongering by nave idealists who erroneously believe world can be made better, & byinternational bureaucrats looking to expand influence.
Heroes risk-taking individuals/enterprises inventing cleaner/cheaper technologies
Moral/Policy Solutions Compare the costs of prevention to costs of adapting a few decades hence.
Money not spent on preventing climate change can be used to tackle other, more pressingenvironmental and social ills.
Technological progress and the unpredictable forces of creative destruction will make fuss overclimate change irrelevant; e.g., cheap renewable energy
Until the science of climate change is better understood, no government action beyond theelimination of subsidies and distortions of the market
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Implications for Policy Change
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The Bhopal Tragedy1984
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Social Amplification of Bhopal: Right-
to-Know Law in the USA
After Bhopal there was public pressure on the US government to
provide people with information about the risks they faced from
industries in their areas
In response, the US government imposed an information disclosure
requirement on companies
SARA Title III-1990
The Community Right to Know Act
Companies had to report data to the Environment Protection Agency
about their emissions into air & soil
After years of costly, people- and information-intensive command-
and-control regulation, this was a different type of law that only
mandated reporting.
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NGOs and Right-to-Know Data
The data provided by companies is in raw form that is
difficult for the public to access and interpret
Environmental Defense, an NGO, has created a web-
based interface that helps the public make better senseof the emissions data
Interpretation of the data may reflect the perspective of
environmentalists on risk ranges rather than a scientific
consensus
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EPA Compiles Emissions Data in Toxics
Release Inventory
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NGOs Make TRI Information Easier to
Interpret: e.g., RTK Network
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www.scorecard.org
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Context is Favorable to Disclosure
Right to Information Law passed in India
Transparency and Accountability promoted by Rio and Aarhus
Declarations
Corporate Social Responsibility increasingly influencingcorporate behavior
Era of leaks
Whistleblower protection measures being enacted
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Rationales for Disclosure
Normative:
Citizens right to know
Substantive:
Data lead to insights and understanding ofenvironmental problems and remedies
Instrumental:
Improves corporate compliance andenvironmental performance
Enables citizens to protect themselves
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But can people readily understand and
interpret risk data?
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Risk Communication Challenges
Asim Parekh, a vice presidentof Coca-Cola India, said his"heart sank" when he firstheard the allegations
because he knew consumerswould be easily confused .
"I have tried my level best tocommunicate this information.But even terminology like
PPB - parts per billion - isdifficult to comprehend. Thismakes our job verychallenging.
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The Contested Landscape of Risk
Management
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The Case of
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Joe CamelSmooth Character
But Joe
Camel was
taken to
court on the
charge ofinducing
children to
smoke!
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And Now?
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What Happened In Between?
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This did not happen by itself
It took a sustained campaign by the Surgeon
General and anti-smoking interest groups to
end the coolness factor of smoking
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Today!
For forty years tobacco companies had won
every lawsuit brought against them and
never paid out a dime. In 1997 that all
changed. The industry agreed to a historic
deal to pay $368 billion in health-relateddamages, tear down billboards and retire Joe
Camel.
The Charges:
Campaign of misinformation & deceit.
Denial that nicotine is addictive
Targeting of children in their ads.
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Governments Will Keep Collecting Big
Bucks from Big Tobacco
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In India Too One Policymaker
Hammered Through a New Law
Which, surprisingly, seems to work and is more or less enforced!
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Attempts to Achieve A Middle Ground
Requires that we move beyond Decide-
Announce-Defend and NIMBY
Requires that multiple perspectives are
respected, e.g., Niyamgiri tribals view of hill
Requires that importance is given to two-way,
open, consensual process
But even then, we may not be able to achieve
solutions or compromises that work
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As We Saw in Case of Biotechnology Risk:
The Bt Brinjal Consultations