Howard Kunreuther: An appreciation

Howard Kunreuther and I have been friends and coauthors for most of our careers as economists. As he and I cope with old age and poorer health, I am happy to have written a policy paper on insurance and wildfires in California with Howard, because it encapsulates so much of what I have learned from him and as well the pure joy of stumbling across new ideas and new ways of explaining old truths that has characterized his work (Pauly et al., 2023). Howard’s unique contribution comes from his distinctive approach as a self-designated “irrational economist.” He knew from his time at University of Chicago the maxim of Milton Friedman that both economic theory and empirical work do not try to explain or predict everyone’s behavior, but only central tendencies and average responses. From that he took as his challenge explaining the deviations from those averages, based on the common sense observation that some people behave differently from others in the same circumstances, and differently from what economics suggests. Nowhere was the deviation more common, more interesting, and more important for public policy in how individuals cope with risk, and nowhere is there a more interesting manifestation of these differences than in actual insurance markets—whether we are talking about the behavior of people who might buy insurance or about people who might manage and sell insurance. Of the total supply of irrationality in the world, Howard recognized that these market arrangements to deal with risk seem to have captured a disproportionate share. A prime example of irrational behavior he studied has been insurance purchasing against climate disasters. Even when premiums are government subsidized, a very large fraction of property owners fails to buy coverage against floods or earthquakes. When an area is hit by such a loss, insurance purchasing surges afterward, only to erode away as the event becomes more distant. Economic theory argues that the alternative to no insurance is not just avoiding unaffordable insurance premiums; it is the risk of a much more unaffordable catastrophic loss—but homeowners often fail to protect what is their most valuable asset, and even resist lenders who try to get them to take and keep coverage. His major focus (from before we met and through our collaboration) has been on insurance for natural disasters, as exhibit A in the gallery of low probability high consequence events. We began to work together at a palace in Austria (of all places) where Howard greeted me with “We should write a paper together.” I had come to the topic of insurance via health insurance but was fascinated with the economic theory of insurance which, of course, is both a marvel of logical consistency and a very imperfect predictor of what many people do. Our challenge, so fruitful over the years, has been to combine where we could and contrast where we must the rational and irrational; the trick was to find a rational explanation for irrationality., Costs of decision-making and the desire of insurance purchasers to “set it and forget it,” even if the environment is continually changing, both played major roles. We had lots of discussions, directed at puzzling our way through apparently inexplicable behavior and outcomes; so much so that our families in a shared minivan eventually asked us to switch to talking about football or anything but insurance economics. This present paper was generated by observation about insurance buyer and seller behaviors, and the discomfort of policymakers and politicians with both. Many homeowners in high fire risk areas of California did not buy fire insurance, for the perennial reasons that “it won’t happen to me because it hasn’t happened around these parts for many years” and “insurance is expensive and confusing.” Insurers did not help their case by (as usual) being unable to explain why their premiums for owners who never had a fire (yet) were high and rising, and by not being appropriately sensitive to owner efforts to mitigate fire risk. The paper captures Howard’s long time fascination with how people make decisions based on what others are doing (or not doing) rather than starting from scratch with a careful weighing of pros and cons. Both the wisdom and the foolishness of crowds are important—and in the application to wildfires, what your neighbors did for mitigation was important not only as an example but also as a probable direct influence on the risk your house would burn in a neighborhood fire. Howard never took the point of view that, if you were smart enough to think of an interesting idea, the data and the funding for you to pursue that idea ought to fall from heaven. Instead, he has been a force of nature (embodied in the Wharton Risk Center which he founded) for engaging the insurance industry and its regulators in planning, funding, and (most important of all to an academic) providing the data that might answer the question of whether what people do could be done better. His “force of nature” character assured me (and his other coauthors) that there would be relevant analysis with interesting data and surprising conclusions out of any project with him; projects always finished and did not dribble away. In this paper on insurance and wildfires, the relevance was to a need in California for some clarification of both public policy and insurer behavior in a troublesome setting: an increased risk of wildfires that spread to built-up areas challenged insurers to offer coverage at justifiable prices that took proper account of the variation in risk across homes depending on how likely they were to burn. Insurers had to deal