Wednesday, May 6, 2020

Understanding Risk in the Time of Covid-19

I am something of a risk management expert. A significant part of my professional career has been advising organisations on how to effectively manage risk, so I can justly claim to know a thing or two about the subject. The responses of governments all around the world to the Covid-19 outbreak have demonstrated how poorly understood the science of risk management is amongst our leaders.

Risk is quantitatively assessed as likelihood times impact. In other words, the chances of the risk eventuating (if we don't do anything to avoid it) multiplied by what happens if it does. One of the problems with Covid-19 is that governments, at least initially, under assessed the likelihood. They have also overestimated the impact with their projections of huge numbers of deaths. Having assessed the risk, you then have to assess the possible mitigations and their costs. Governments have compounded their errors by going straight to the most extreme form of mitigation and not quantifying the costs.

Time can be a significant factor in risk mitigation. I was listening to a podcast this morning in which an academic in America was discussing the poor state of infrastructure in many US states. He gave an example where a state government had decided to defer repairs on a short stretch of highway that would cost $6m if done today. Leaving the maintenance unaddressed for just two more years would result in a six-fold increase in the cost of repair. Under those circumstances, it seems crazy not to carry out the mitigation today.

One of the worst effects of a lack of understanding of risk management is the precautionary principle. This is the belief that unless you have complete knowledge about the likelihood and impact of the risk, either you shouldn't take any action at all (e.g. not allowing the trial of a new drug) or you should go all-out to prevent the risk eventuating (e.g. locking down the population in a pandemic).

Imagine you have a sore leg and you go to the doctor, who takes one look at it and says it might be cancer and therefore he should amputate. This is the precautionary principle. At the very least, you would want to understand the likelihood of it actually being cancer and the prognosis for that particular form of cancer before you agreed to the surgery. Some cancers are benign and don't need to be treated at all. Others are minor and localised and a simple excision of the tumour might be sufficient. You would weigh up the likelihood and consequence of the diagnosis against the cost (in loss of mobility, ability to work, etc.) of the mitigation. You may decide that the cost of any mitigation is more than the benefit gained from the treatment (a not-uncommon decision particularly amongst elderly cancer patients).

The most obvious real-world example of reliance on the precautionary principle today is the various zero-carbon initiatives legislated by governments around the world. Stopping all or most of the use of fossil fuels, which we literally rely on to keep us alive, in the belief that it will prevent global warming is, from a risk management perspective, extreme folly. The claims of "settled science" notwithstanding, we have little certainty about the direct impact of manmade carbon dioxide emissions on the climate, so banning the most common, economic and safe forms of energy before we have the chance to develop reliable alternatives, is unjustified.

Some experts were calling for the New Zealand Government to quarantine everyone entering New Zealand back in February, when we had no Covid-19 cases. That mitigation, as disruptive as it would have been on our tourism and international education sectors, would have cost a fraction of the complete lockdown of our economy that was adopted once we had multiple cases of the disease within our borders. Philip Thomas, a professor of risk management at Bristol University, has estimated that if GDP falls by over 6.4 per cent over the next two years as a result of prolonged economic inactivity, more lives will be lost than saved thanks to rises in poverty, violent crime and suicide. So, even if you ignore the actual dollar costs, the lockdown may end up costing more in lives than the unmitigated impact of Covid-19 itself.

Effective risk management is almost always about choosing the lesser evil. There is seldom a costless mitigation option. Economists and actuaries understand this, which is why they quantify the value of human life in their models. For example, the economic cost of a death from a motor vehicle accident in New Zealand is valued at $4.34 million. Personally, I consider my life worth a lot more than that, but the transport authorities have to use an average value of life that represents the trade-off they are prepared to make in mitigating the risk of death on the roads. Make it too high, and the models would indicate we should ban all travel by motor vehicles, which would cost a lot more than the value of the lives lost. The problem with government responses to Covid-19 all around the world is that they haven't done these calculations, so it is not surprising they all jumped on the precautionary principle bandwagon and locked us all down.

A further problem with risk management is reliance on specialist expertise. This may seem a strange criticism for a risk management expert to make, but experts are, by definition, narrowly focused on their area of expertise. It would be surprising to find an epidemiologist, for example, who knows a lot about economics. So when governments take their advice exclusively from a epidemiologist, it isn't surprising that their response doesn't give sufficient weighting to the economic costs. Part of the challenge in defining and quantifying a risk is in finding the right range of expertise to do a balanced assessment of likelihood and impact. An engineer who specialises in fluid dynamics, for example, may be as qualified to advise about the spread of a disease as a doctor.

I feel like we're in the early stages of a nuclear war and there is still time to stop the missiles with only moderate damage to each side, but no one has the courage to agree a ceasefire. At some point rational thinking has to enter the higher realms of decision making about Covid-19. Our governments have largely ignored the costs of mitigation, but once these become apparent - like the smouldering remains of nuclear strikes - we're all going to wonder why we didn't come to our senses earlier.

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