Wharton's Howard Kunreuther and Erwann Michel-Kerjan discuss the 2017 Global Risks Report

Economic inequality, societal polarization and environmental dangers are the three trends that will create the most challenging problems for the world over the next 10 years, according to an annual report that was released at the World Economic Forum (WEF) in Davos, Switzerland, this week.

World leaders are gathering in Davos to discuss some of the greatest risks facing the world, and how they might collaborate in solving them. They will be guided in their deliberations in part by the annual Global Risks Report, developed in collaboration with the Wharton Risk Management and Decision Processes Center.

Those three key risks form the uppermost layer of 30 different economic, environmental, geopolitical and technology-related challenges and 13 underlying trends included in the report, which was based on surveys with 750 experts. This is the 13th year the Wharton center has produced the global risk report for the WEF.

The environmental risks that rank high in the report highlight issues related to climate change, said Howard Kunreuther, Wharton professor of operations, information and decisions, and co-director of the center. “We are facing a real challenge in [the U.S.] in terms of how we are going to deal with [climate change],” he added. He noted that the 2015 U.N. climate change conference held in Paris, and the agreement reached by delegates there, was “one success that hopefully will play a role” in shaping future agendas of governments. He upheld the Paris meeting as a model in securing wide endorsement across countries.

“A disempowered citizen may go for something very different because he or she is tired of the status quo.” –Erwann Michel-Kerjan

Another top risk factor is social instability, especially as it relates to wealth disparity and how it will impact the job market. The risk reports for 2016 and 2017 highlighted how income disparity has caused a growing distrust in elected officials around the world, noted Erwann Michel-Kerjan, the center’s executive director. Both reports raise alerts about how “a disempowered citizen may go for something very different because he or she is tired of the status quo,” he added. He said that such disenchantment doesn’t occur overnight, but builds up over time, and that the reports over the years have taken increased notice of these issues.

Kunreuther and Michel-Kerjan discussed the main takeaways from the annual Global Risks Report on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Tensions over Globalization

According to Kunreuther, a top issue for the World Economic Forum this year is to review its stance on globalization. He cited an article in The New York Times by Andrew Ross Sorkin that highlights “the shifting political trends toward nationalism and against a sense of globalism” as the top challenge for the so-called “Davos class” of elite world leaders who failed to anticipate them.

“Davos has to address this tension” of managing opposing ideas, Kunreuther noted. On the one hand is the advance of globalization. On the other, countries are focusing more on their own individual issues and nationalism. Another contentious issue relates to trade, he said. “Do we push for free trade or high tariffs? How do we balance out what happens within the country and what happens throughout the world?” The Global Risks Report considers such issues against the backdrop of interdependencies in the world economy, he added.

“If we keep pushing for globalization as the only model, and fail to be inclusive enough and to be responsive enough, we’re going to fail millions of people, if not billions of people,” Michel-Kerjan added. “They’re going to react to that. That is exactly what has happened.” He noted that “Responsive and Responsible Leadership” is the theme for this year’s Davos gathering.

Geopolitical and Technology Risks

Among the top geopolitical uncertainties the world faces is Brexit in the U.K., said Michel-Kerjan. He pointed to other events such as the French presidential elections in May and the resignation following a referendum last December of Italian Prime Minister Matteo Renzi. Yet another is the outcome of the U.S. presidential election and how the Trump administration might “manage its [vision and] purpose, given the business background of the new President.”

“Myopia plagues all of us in our decision processes.” –Howard Kunreuther

The gains that technology brings carry the seeds of risk as well, according to Michel-Kerjan. Work is underway on using artificial intelligence in cloud platforms, and it promises big benefits such as global access to medical data, he noted. “A medical student at Penn could treat a patient in Africa after looking up that individual’s medical records,” he said. But the flip side of that involves privacy issues, with more clarity needed on who controls those cloud platforms, he noted. “Are you ready to let machines control your future?”

Kunreuther noted cyber security as a top risk factor, especially when today’s technologies enable data to be immediately leaked over, say, a Twitter feed. “[The safety of] our technology is going to be an important risk for us to consider,” he said. However, sufficient data does not exist to predict the likelihood of such risks unfolding and their consequences, he added. “Models could be created to make predictions, but the challenges are in understanding the interdependencies of the various risk elements.”

Michel-Kerjan said the younger generation, which he defined as people under the age of 27, “thinks very differently” from the older generation about technology and the shared economy. “They will push much faster than what we’ve seen before through the ‘Fourth Industrial Revolution,’” he added, referring to the title of a book by Klaus Schwab, the founder and executive chairman of the WEF, that examines how new technologies are “fusing the physical, digital and biological worlds.”

Time-tested Methodology

According to Michel-Kerjan, his center’s methodologies have shown “great results” in accurately assessing such risks over the years, especially in how those risks interact with each other. The report includes an interactive tool to assess risks at the country level that help in such forecasting.

“These things don’t happen in a vacuum, or in silos,” said Michel-Kerjan. “You have to understand the links between them and stop being surprised. I’m personally very surprised that people were surprised about Brexit and [the populist victories in] elections around the world.” For example, he noted that backtracking from globalization is being seen as a new trend, but pointed out that his center’s reports of 2007, 2008, 2009 and 2010 did in fact list retrenchment from globalization as one of the top three risks.

The 2007 risk report listed risks including data breaches and privacy issues, even though they were not being publicly discussed at that time, Michel-Kerjan said. “Fast forward 10 years to 2017, and data breaches have become very common.”

“Do we push for free trade or high tariffs? How do we balance out what happens within the country and what happens throughout the world?” –Howard Kunreuther

Another telling example is the center’s prediction of the current debate over fake news. “In 2013, years before ‘post-truth’ became the 2016 word of the year, the Global Risks Report highlighted the rapid spread of misinformation, observing that trust was being eroded and that better incentives were needed to protect quality-control systems,” the 2017 report noted.

An Agenda for Action

In identifying the risks the world faces, the main objective of the WEF reports is to spur governments, businesses and society at large to take remedial steps in good time, said Kunreuther. “It is important to ensure that people understand that with corrective action, they could receive benefits now and not just over the long term.”

Kunreuther described the Global Risks Report as “a model for putting such issues on the table” and addressing what could be done today. That is important, he noted, “because myopia plagues all of us in our decision processes.” Michel-Kerjan pointed out that with issues like climate change, past efforts have focused on mitigation of its adverse effects, but those effects are occurring much sooner than anticipated. “We don’t have the luxury to wait another 200 years to do something.”

In addition to mitigation, efforts to address risks must also focus on adaptation, said Michel-Kerjan. He explained that businesses could look at not just risk management, but also identify new products and services they could offer their clients in the emerging business environment. “The flip side to these discussions is the opening of new market opportunities.”

But challenges remain. Governments worldwide resist taking adequate and timely action to address risks because of the lack of sufficient knowledge and understanding of the issues involved, said Kunreuther. For example, insurers are interested in providing protection against some of these breaches, but they don’t have sufficient data on those events or the communication channels in place to obtain such data, he noted. “We can put [such risks] on the table, but how you’re going to solve them or deal with them is still a very open question.”