In the past, companies have frequently neglected early warning signals about potential hazards for human health or the environment associated with their products or operations, as in the case of carbon emissions.
A new study "2013 Late Lessons" produced by the European Environment Agency (EEA), reviews and identifies main factors responsible for the disregard of early warning signals.
The report shows how economic motives often drive non-precautionary business decisions. In virtually all reviewed cases it was perceived to be profitable for industries to continue using potentially harmful products or operations.
However, decisions are also influenced by a complex mix of epistemological, regulatory, cultural and psychological aspects. For instance, characteristics of the research environment and the regulatory context can provide business actors with opportunities to enter into 'political actions' to deny or even suppress early warning signals. Also, business decision-makers face psychological barriers to awareness and acceptance of the conflicts of values and interests entailed by early warning signals. Cultural business context may further contribute to the denial of conflicts of values.
The idea of profit maximising firms embraces a rationality according to which ethical values are reasons to act if and only if they contribute to the expected economic benefits for the business actor (Le Menestrel, 2002). In particular, nature and society at large are external to the business environment, and potential societal and environmental costs are not to be taken into account in business decisions unless they imply potential costs for the business actor.
Accordingly, the internal risk evaluation that is part of the standard cost-benefit analysis toolbox is typically limited to minimising financial business risk, i.e. the comparison of expected revenue or profit figures (Sommerfeld, 2010). External risks to human health or the environment may enter the calculations, but only insofar as they indirectly pose a business risk via legal liabilities, regulatory restrictions or reputation risks for the company.
Economic rationality is thus remote from a proactive precautionary response to early warning signals. Virtually all reviewed cases have in common that early warnings about harmful effects were available, but that the prospect of short-term profit generated strong economic incentives for companies to continue with their practices.
When early warnings signals occur, people have typically not directly experienced the hazards themselves. In that case, people tend to neglect the likelihood of rare events (Hertwig and Erev, 2009). As Kahneman (2011) emphasises, 'when it comes to rare probabilities, our mind is not designed to get it quite right. For the residents of a planet that may be exposed to events no one has yet experienced, this is not good news.'
The psychological hurdles for a proper recognition and evaluation of early warnings apply to business decision-makers and the general public alike (Boyd, 1997). Note that in exceptional cases, this psychological disposition can trigger an opposite effect, namely when a low-probability event does indeed occur. Then, people may even — at least temporarily — overrate the probability of occurrence (Sunstein, 2003), and increased public concern may lead to faster regulatory measures. This may have been the case for the German decision to phase out nuclear energy after the Fukushima accident in 2011. In most situations, however, human risk perception seems to impede precautionary corporate action as well as public pressure for responding to early warnings with precaution.
A related phenomenon is the so-called 'pensioner's party fallacy', according to which people tend to overrate the fact that some people live long in spite of exposure to harmful substances and are hence still present at pensioners' parties — as opposed to their deceased colleagues — and this presence is perceived as evidence against the existence of harm (EEA, 2001). Here, people neglect the fact that their personal experience with formerly exposed colleagues is biased towards meeting the survivors. For instance, this effect is likely to play a role also for the perception of risks from smoking.
Another well documented characteristic of risk perception is that immediate losses or harm have a larger bearing on people's beliefs than losses or harm in the future (Dana, 2003; Weber 2006).
Economic models capture this systematic bias in preferences over time by using discount factors for present value calculation. Recent 'behavioural economics' approaches even use hyperbolic discounting to represent the seemingly exponential diminishing of value over time. This systematic bias works against precautionary measures since those measures typically involve direct costs in the present in order to avoid uncertain costs from harm in the — often far away — future.
One may argue that people should decide freely on their 'time preferences' and that any type of paternalism on how to trade off present versus future consequences is inappropriate. Nevertheless, uncertain future hazards also involve consequences for future generations and discounting such consequences based on the time preferences only of the present generation may be questionable from an ethical point of view (O'Neill et al., 2008). There is currently a heated debate about an appropriate discounting of the effects of climate change and of biodiversity loss (Stern, 2006; Weitzman, 2007; Spash, 2007; TEEB, 2009).
Other findings on the limits to taking into account information about risks are noteworthy. For instance, the 'finite-pool-of-worries' hypothesis reflects that the degree of concern for a certain issue depends on the presence of other, perhaps more direct worries, such as the financial crisis, job security etc. (Weber, 2006). For most people, uncertain future hazards may not be high enough on the agenda to invoke any action. The 'single action bias' reflects the tendency not to take further action after one initial step, which leads to suboptimal behaviour when a portfolio of actions or a constant change in behaviour would be appropriate (Weber, 2006). Moreover, there is evidence for cultural differences in how health and safety risks affects decision-making (Biana and Keller, 1999).
Last, even though we have not found psychological studies on the phenomenon, several reviewed cases reported that companies exploited people's tendency to interpret 'no evidence of harm' as 'evidence of no harm' (Chapter 3; Chapter 6; Zelltner, 2000).
There is a need to better understand and expose why business actors do not respond voluntarily to early warning signals with precautionary actions. Blaming business, in particular with hindsight, tends to be common reaction that may not always be constructive. It often misses the complex or even contradictory set of motives and drivers that business actors face.
Public institutions could support progressive business by analysing and publically disclosing the dilemmas and temptations entailed by early warning signals, for example for different industries and for the specific societal and regulatory context of decisions. Rigorous and explicit exposition of the dilemmas will create further incentives for responsible actors to share and communicate their precautionary responses.
An additional reflection centres on the role of political actions of business actors, in particular those actions aimed at suppressing early warning signals. Regulatory efforts that make the political actions of business more transparent can help to sustain a sound balance of power, thereby maintaining our ability to benefit from early warning signals and reducing the likelihood of health and environmental hazards.