Tragedy of the Risk Horizon

From Open Risk Manual

Definition

Tragedy of the Risk Horizon denotes a behavioural / economic phenomenon where certain risks may exceed the management (Risk Horizon) of most actors, imposing a cost on future generations of actors that the current generation has no direct incentive to fix

The phrase was coined by Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, in the context of Climate-Related Risk [1]

The expression paraphrases the well-known economic phenomenon of the Tragedy of the commons where in a shared-resource system individual users, acting independently according to their own self-interest, behave contrary to the common good of all users

The impact of such Risk Management Failure is aggravated when risks are of cumulative nature, hence earlier Risk Mitigation would mean less costly adjustment

Example

In the context of Climate Change, environmental parameters evolve over time horizons that are longer than:

  • the business cycle of environmentally impacting sectors (typically less than a decade)
  • the political cycle of decision makers (4-5 years)
  • the horizon of technocratic authorities, like central banks (with monetary policy having a 2-3 horizon while financial stability policies typically less than a decade)


See Also

References

  1. Breaking the tragedy of the horizon – climate change and financial stability, 29 September 2015

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