Monday, January 4, 2010

Risk Management, Cognitive Bias, and the Global Warming Debate

The debate on global warming tends to revolve completely around the science. Is it good? Is it bad? Is it meaningful? Is it corrupt? Everyone has an opinion on the quality of the science, and once those opinions are formed, they’re almost impossible to shake.

A wide variety of potential cognitive biases complicate the picture. Notice there’s enough here for everybody — no one’s being singled out.

Base rate fallacy — ignoring statistical data in favor of particulars
Confirmation bias — interpreting information to confirm your preconceptions
Experimenter’s bias — with about sixty subsets
Focusing effect — putting too much emphasis on a single aspect of a situation or event
Framing — viewing through a perspective or approach that is too narrow
Hyperbolic discounting — the preference for more immediate payoffs over the long term
Irrational escalation — making irrational decisions based on rational decisions in the past, or to justify actions already taken
Information bias — seeking more information even when it cannot affect action or decision

…the list goes on. Recognize some of these biases? If you’re like most of us, you recognize them in the other side more than you see them in yourself or those who agree with you.

Part of the reason why cognitive bias is at work is that the question isn’t really clear. We’re all arguing about the science, though few of us are truly entitled to an educated opinion on the subject.

But what’s the question?

It’s not about whether a scientific opinion is correct or incorrect. That sort of thing only interests specialists. No, the question has to do with what (if anything) should we do about it, based on the potential cost and consequences.

In other words, it’s a question of risk management. And to the extent that it’s a question of risk management, it’s phrased wrong.

A risk, as you’ll remember, is a future event with some probability of happening that if it happens will have a meaningful impact on your situation. If the impact is negative, it’s a threat. If the impact is positive, it’s an opportunity.

Risks, like Gaul, can be divided into three parts. The first part is probability. How likely is it that the risk will happen?

The second part is impact. If the risk should happen, what would be its effects?

Those two parts combine in the formula R = P x I to calculate a risk score, the value of the risk.

We care about the value of the risk because that helps us make a rational decision about the third element: the cost of reducing or eliminating the negative risk, or the cost of obtaining or exploiting the positive risk.


The argument about the science of climate change is at root an argument about probability. The process of science involves collecting data, discovering patterns in that data, and developing and testing hypotheses and theories about that data. Over time, the process of peer review creates a consensus in the scientific community, and at any moment in time, that’s the state of scientific knowledge.

Let’s sidestep the discussion about whether the consensus of current scientific knowledge is accurate or inaccurate, and merely assess how our own feeling and opinions influence our judgment of probability. Taking as a guide the legal standards of proof, we might fall somewhere on the following spectrum. For a rough calculation, I’ve put in some percentages.

Degree of Belief (Probability You Think It's True)
True beyond any doubt (99+%)
True beyond a reasonable doubt (95%)
True by the preponderance of the evidence (75%)
Unable to tell (50%)
False by the preponderance of the evidence (25%)
False beyond reasonable doubt (5%)
False beyond any doubt (>1%)

This is about what you believe about the science, and a corresponding figure that relates to how likely it is that the threat is true. If you don't like the choices, add one of your own and choose your own probability number.

Notice that the evidence won't stand still. Over time, science will inevitably get better, regardless of your perspective. Either the evidence of catastrophic global climate change will mount so high no sane person can deny it, or global warming will become the Comet Kohoutek of crises, a non-event. Or maybe something in between.

The problem is by the time the facts become incontrovertible, the moment for decision will have passed. If we guess wrong, there are two possibilities: (a) we will be in a significantly worse position to deal with the resultant impact, or (b) we will have wasted significant resources.


This leads us to the second item, the question of impact. Impact is the effect of the threat or opportunity if it happens — even if you believe the chance is remote at best. So we have to set probability aside temporarily. We’ll come back to it in a moment.

In addition to arguments about how likely it is that the scientific consensus on global warming is in fact correct, there is a range of opinion as to what that means in practical terms: a range of impact. I've specified a set of potential impact levels and set costs for each. Remember, the issue isn't whether these are going to happen. They're simply descriptions of the potential level of impact that different parties suggest are possible.

So choose from the list below. What, in your opinion, is the worst possible potential outcome if global warming happens?

  • Catastrophic. Global warming effects will kill tens or hundreds of millions of people directly and indirectly, wipe out tens of thousands of species, and be an economic and social catastrophe to those who survive. Repair or rebuilding may or may not be possible. (Cost = $Quadrillions)
  • Serious. Major weather events, such as hurricanes and tsunamis will be more prevalent, tens and hundreds of thousands will die, economies will suffer. (Cost = $Trillions)
  • Moderate. Managing environmental issues will be a consuming issue, but better management and improved technology will make this a background costs. (Cost = $Billions)
  • Minor. Insignificant costs. (Cost < $Millions)
Notice the impact could also be positive.

Value of the Risk

Just because you aren't convinced the evidence in favor of a risk is certain doesn't mean you don't act on it. We take everyday precautions to avoid low probability or highly uncertain risks with potentially high impact all the time — every time we drive on a freeway, for example. But there's a limit. How does the value of the risk compare to the cost of mitigation?

The value of the risk, as we’ve noted, is the probability times the impact. From our earlier work, we can construct this table. The risk score in each case is what you should reasonably be willing to spend if necessary to mitigate the degree of risk you personally believe is present.

95% confident, $Quadrillions
75% confident, $Low Quadrillions
50% confident, $1 Quadrillion
25% confident, $High trillions
5% confident, $Low trillions

95% confident, $Up to 1 Quadrillion
75% confident, $750 trillion
50% confident, $500 trillion
25% confident, $250 trillion
5% confident, $50 trillion

95% confident, $Up to 1 Trillion
75% confident, $750 billion
50% confident, $500 billion
25% confident, $250 billion
5% confident, $50 billion

95% confident, $Possibly a few billion
75% confident, $Less than a billion
50% confident, $500 million
25% confident, $250 million
5% confident, $Low millions

Cost of Mitigation

The value of the risk is what you’re willing to spend if necessary. Depending on how you assessed probability and impact, you ended up with some amount of money (perhaps $0) that's appropriate as a maximum to spend on the risk.

Of course, you need to compare that to the cost of mitigating or eliminating the risk. Sometimes, it’s not worth it. If I offered to save you from a $1,000 risk in exchange for $2,000, it’s not much of a deal. In general, if the cost of getting rid of the risk exceeds the cost of living with it, you’re better off living with it.

On the other hand, if I can save you from a $1,000 risk (say, a 25% chance of losing $4,000) for only $500, that's a pretty good deal. If the risk happens, you've saved $3,500. But if the risk doesn't happen, you're still out $500.

It's true that not all costs of a risk (or costs of a risk mitigation) can be easily translated into dollar terms — or even should be. That doesn’t change the basic principle, though: the cost of dealing with the risk has to be less than the cost of living with the risk.

There’s an important qualification when it comes to risk mitigation. Some risks you can get rid of altogether if you’re willing to pay the price. Other risks you can reduce, but not eliminate. You can lower the probability of the event occurring, or you can lower the impact if it should occur.

That’s not a bad thing, mind you, but you have to take into account the residual risk when deciding if the strategy is worth it. The value of that risk is the difference between the cost of the original risk and the cost of the residual risk.

The Right Question

To have a reasoned discussion on the subject of global warming, you have to figure out where you are on five issues, not merely one.

1. How correct is the scientific consensus on global warming?
2. What is the impact of global warming if it should occur?
3. What is the value of the risk (probability times impact)?
4. What is the cost of mitigating or eliminating the risk, and how much residual risk would remain?
5. In balance, what level of action on global warming (if any) is warranted?

To change someone’s opinion, you have to change that person’s evaluation of at least one of these issues.

As people on all sides have found, it’s nearly impossible to change anyone’s evaluation of the quality of science, which is our probability benchmark. There’s often more consensus of what global warming might mean if it happens, which is why it’s so important to separate discussion of probability from the discussion of impact.

But the real opportunity has to do with the issue of cost. The best current framing of the debate comes from the argument that dealing with global warming and environmental issues can be relatively low in cost, or ideally profitable.

If the cost to deal with global warming is low enough, it's a good idea even for those who think the probability is low.


  1. Excellent analysis, Mike. It's also worth noting that some of the potential impacts are not evenly distributed; a slight rise in sea level matters little to most countries, but could be catastrophic to a low-lying island country. So their risk assessment and action plan should be different. The difficult part is that the causes and impacts (assuming the science is correct) are not distributed in the same way, so the incentives are not correlated (e.g., Big Country has 20% of the CO2 emissions but would suffer only a minor $$ impact, therefore they are not strongly motivated to spend hugely to correct the issue).

    My general position is that we should look for things we can do to mitigate warming that have other positive benefits and where the cost is not crippling, and do those right away. For instance, greater energy efficiency, cleaner energy sources, and encouraging development of those things (and a smart energy grid) would all have multiple benefits beyond mitigating global warming.

  2. Too often also the debate is framed in terms that obscure the cost in terms of human suffering. Global warming alarmists talk about the death toll from their apocalyptic scenarios, but gloss over the fact that people will die as a result of the Carbon Tax. People will freeze as heating costs rise, they will starve as food costs rise, they will be denied access to medical care as transportation costs rise. For much of the world the impact of energy rationing will mean the difference between life and death.

  3. Steve - Yes, impact and cost are both unevenly distributed, and people who have to pay a disproportionate cost are normally disproportionately upset about it, which adds to the noise volume.

  4. Misha (Naamaire) - You're absolutely right that secondary risk (the new problems caused by the proposed solution to the original problem) is often nontrivial. The first part of the answer, as you've correctly done, is to point out that those costs need to be entered into the discussion. Then we can look at the related issues: are the secondary costs disproportionate? Can they be reduced or eliminated? Is there an alternate course of action that would lessen the harm? Unfortunately, there are situations in which the choice is not whether to hurt some people, but only to decide which people to hurt — my "bad decisions" trope.

  5. Steve and Misha - That's why I think Steve's final paragraph is the essence of short-term common sense on the subject. Things that are profitable or relatively inexpensive ought to be tried first. As the evidence (whatever it shows) continues to come in, the goalposts of reasonable action will inevitably move in one direction or another.

    I've got a second part to this coming up on Thursday; in it you'll find a handy-dandy "What Should We Spend On Global Warming" calculator. (If you know anyone who could turn it into a Facebook app, by the way, please let me know.)

    Thanks, both, for commenting.

  6. One of the problems in some situations is that if you *are* correct about certains risks and take measures to protect against them, the predicted negative events do not occur or are minimized and then the naysayers look back and say, "See, they were wrong and that was all a waste."

  7. Alice — That's right. Because risk involves uncertainty, you can't know in advance whether it will happen, and you often can't know after the fact whether it would have happened. People who didn't believe in the risk in the first place tend to be skeptical that your solution made any difference.

    But that's based on a wrong understanding of what risk is all about. We *don't* know whether certain things might happen, and in fact we often know they might not. The best strategy is to reduce the cost of dealing with the risk as much as you possibly can.