Sunday, October 18, 2009

Wall Street, Climate Change, and Risk Tolerance

I've been wondering for the past couple of weeks why I haven't heard anyone comparing the recent debacle on Wall Street with the upcoming mess we are making with regards to our climate. It seems to me the errors of the past decade - not understanding complex financial instruments, underestimating the likelihood and the consequences of the devastating scenarios - are the exact same mistakes we are making in the current climate change debate. So it's heartening to hear someone finally parallel the two.
We condemn Wall Street for taking risks with our economy — risks that all of you are trying very hard to reverse — but at the same time we’re taking exactly the same kind of risks, with no upside whatsoever, with regard to our climate, failing to practice even the basic risk management techniques in terms of climate change reduction.

That's J. Wayne Leonard, CEO of Entergy, addressing the US Congress. Am I imagining the parallels between the two cases or is there a similar discounting of long-term risk because we fail to recognize how catastrophic the worst-case scenario would be?

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Compared with the totality of knowledge which is continually utilized in the evolution of a dynamic civilization, the difference between the knowledge that the wisest and that which the most ignorant individual can deliberately employ is comparatively insignificant. ~Fredrich Hayek in The Constitution of Liberty