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Opinion
The Myth and Reality of Risk
7/25/2008
The traditional view of risk management plots the probability of an event from very low to very high on one axis, say the vertical, and the impact of that event from very low to very high on the horizontal axis. The first priority is to deal with risks in the upper right of the graph, the ones with a combination of high impact and high probability. The ones in the lower left, low impact and low probability, get the lowest priority.
It's all so logical. What can go wrong? As I see it there are three places we can go astray:
1. The accuracy of the quantitative model;
2. The quality of the data used in the model; and
3. The fact that people are not always rational.
Accuracy of the Model
Any quantitative model involves assumptions that dramatically impact the results. In 2006 the EPA released new regulations on mercury emissions from coal-burning plants based on estimates that reducing emissions more aggressively would cost the coal industry $750 million a year while only benefiting public health by $50 million per year. But a cost-benefit study by Harvard's Center for Risk Analysis, ironically funded by the EPA, concluded that the $750 million of expenditure by the coal industry would result in a public health savings of $5 billion dollars per year. It turns out that the EPA's analysis focused on the effects of reducing mercury levels in freshwater fish while the Harvard analysis included ocean fish such as tuna.
Quality of the Data
Those of us in IT know how hard it is to get good data. In the 1970s the Occupational Safety and Health Administration (OSHA) was considering the cost of an 85-dB noise standard. One defense contractor estimated the cost to be $31.6 billion; another estimated the cost at $11.7 billion. The difference was the technology used to reduce noise. In risk analysis the problem is further compounded by the fact that some things are hard to quantify. The EPA's "value of a statistical life" is a good example.
People Are Not Always Rational
Finally, people aren't particularly rational about risk. Shortly after the shootings at Virginia Tech, I wrote in this column:
"Ironically, FBI statistics show that the murder and non-negligent manslaughter rate in the United States has been steadily falling since 1993, from 9.5 per 100,000 people in 1993 to 5.6 in 2005. College and universities are even safer. In 2005 there were 5 murders and non-negligent manslaughters on campus out of a population 6.3 million students. The resulting 0.08 per 100,000 students is less than 2% of the national average....Stated differently, even if an event like the one at Virginia Tech were to happen every year, a student is far more likely to be murdered while home on summer vacation than on campus during the academic year."And how much traction did that argument have with concerned parents? Were our subsequent activities to develop prevention and response plans based on a structured cost-benefit analysis? No. They were based on the concerns of students and their parents.
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