Getting Risk Wrong. It's not just BP. It's You and Me

06/14/2010 02:37 pm ET | Updated May 25, 2011

Over the first few years after we moved into our house, the basement occasionally flooded. Mostly inside the front wall of the house as the underground water table rose. So we installed one of those under-the-foundation drainage systems along the front of our house, and it protected us from flooding really well. Until this year.

A couple months back it poured rain, for days. Ten inches in one stretch, 6 inches more a couple days later. The basement flooded. The drainage system had worked but we had only installed it along the front edge of the foundation. The water had poured in along all four walls. We had cheap-ed out back when we put the system in, figuring the chances of THAT kind of catastrophic flooding were so remote, and the cost of putting in more drainage so high, that the risk wasn't worth it. There could be big consequences, yeah, but it was a really low probability risk, so we gambled.

Three thousand dollars in basement clean-up costs later, I'm thinking about BP and the Deepwater Horizon oil rig disaster. I'm thinking about how all the pundits are pointing out how poorly BP analyzed their high consequence, low probability risk. And I'm thinking that the people who run BP are people too (say what you want about the oil industry) and they are subject to the same psychology that led me to my mistake, and probably contributes to mistakes you make about risks all the time.

Risk, defined, simply means the probability that something bad may happen. Probability is calculable, at least to some degree. Bad is not. Bad is subjective. Bad isn't about the facts, it's about how those facts feel. Bad to you, and bad to me, and bad to BP, are different, and depend in part on our individual circumstances, and in large part on the underlying psychology we all use - individuals in homes and individuals making decisions for oil companies - to gauge the "badness" of a risk.

As part of the psychology of risk perception, we weigh risks and benefits. Not consciously, and not in hard numbers. This is a gut economics. To me, after putting in drainage to prevent the most likely kind of flooding in my basement, the remote likelihood of a catastrophic flood didn't feel bad enough to be worth another couple thousand dollars to install more drainage. To BP, the bad of a catastrophic well failure was so remote (and, thank goodness, these failures really are rare) that it didn't outweigh the lure of $70/barrel of oil X millions of barrels. We're both paying for weighing risks and benefits and getting it wrong.

Risk perception is affective, a mix of facts and feelings, cognition and intuition, reason and gut reaction. We use the partial information we have to make judgments from moment to moment about how to stay healthy and alive and, since we rarely have ALL the information we need, or all the time we need to go get all that information, or all the smarts we'd need to understand a lot of the information even if we had the time to go get it, we assess our partial information through a system of subconscious mental processes and psychological/emotional filters to quickly, instinctively, gauge whether there is danger and, if so, how much, and what we should do about it.

The problem is, that works fine when the threat is an attacking lion, or a bunch of bad guys waving clubs and spears, or simply the dark--the simpler threats we faced as this risk perception system evolved. Now, however, the risks are offshore drilling and climate change and nuclear power and genetic engineering, more complex modern technologies and products which, while they afford incredible progress, demand a more thorough analytical risk assessment which the human mind is not yet equipped to do.

So we stumble forward, and call it progress, only sometimes our inability to assess risk analytically gets us into trouble. Oil rigs collapse, drugs and chemicals turn out years later to have dangerous side effects, and, metaphorically, our individual basements flood. We assess risk well most of the time, but mistakes are going to happen. Before we point angry fingers of blame at others, we need to honestly realize that the affective, imperfect system of human risk perception is not just what greedy corporations do. It's what we all do, the people who make the decisions at those corporations, and you, and I.