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Learning from Catastrophes: Strategies for Reaction and Response by Michael Useem, Howard Kunreuther

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14. Long-Term Contracts for Reducing Losses from Future Catastrophes

Howard Kunreuther

The Wharton School, University of Pennsylvania

Overview

Many individuals and firms do not invest in protection until after a disaster has occurred because they tend to ignore risks and are highly myopic. People tend to focus on the expected benefits of these investments over a short time-horizon in relation to the upfront costs. If the costs of reduction are high, the measure is often not viewed as economically feasible and/or financially attractive. Another reason for individuals’ reluctance to invest in mitigation measures is that the likelihood of the event is perceived to be below a threshold level of concern: Those at risk might feel that the event will ...

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