By: Aria Martinez 

How do business leaders respond to natural disasters that nearly impact their operations in an era of increasing climate uncertainty? A fascinating study suggests that corporate executives may be more influenced by close calls than purely rational analysis would dictate.

The research by Olivier Dessaint and Adrien Matray from INSEAD and Harvard University examined how companies react when hurricanes strike nearby areas but spare their own locations. Their findings reveal a pattern of behavior that raises essential questions about how businesses assess and respond to climate risks.

The “Near-Miss Effect”

The study found that companies in counties adjacent to hurricane-affected areas temporarily increased their cash holdings by about $15 million on average – despite facing no direct impact from the storms. This “near-miss effect” persisted for roughly 21 months before cash levels returned to normal.

This reaction is particularly noteworthy because the actual risk of being hit by a hurricane didn’t increase after these events. The researchers found no statistical evidence that a hurricane strike made nearby areas more likely to be shot in the following months or years. In other words, companies responded to the perception of increased risk rather than any real change in probability.

“It’s a bit like becoming extra cautious after seeing a car accident on your commute,” explains Adrien Matray. “The road isn’t more dangerous than before, but the vivid reminder of the risk makes us change our behavior temporarily.”

The Cost of Caution

While maintaining higher cash reserves might seem like prudent risk management, the research suggests this reactive approach comes at a cost to shareholders. The increased cash holdings led to lower returns and reduced market value compared to similar companies that didn’t boost their reserves.

The researchers estimate that for every extra dollar held in cash due to hurricane proximity, company market value increased by only 71 cents – suggesting investors viewed the additional cash reserves as partially wasteful. For the average company in the study, this translated to approximately $3.2 million in lost market value.

This finding highlights business leaders’ crucial challenge: balancing legitimate preparedness for climate risks against the cost of overreacting to dramatic but statistically insignificant events.

Learning From Experience

Interestingly, the study found that companies’ reactions to hurricane near-misses changed with experience. Firms that had previously experienced such events showed progressively smaller increases in cash holdings after subsequent close calls. This suggests that managers learn over time to calibrate their responses more appropriately.

Matray notes, “This learning effect is encouraging. It shows that while initial reactions might be driven by emotion and availability bias – the tendency to overweight vivid, recent experiences – organizations can develop more measured responses over time.”

Implications for Climate Change

As climate change increases the frequency and intensity of extreme weather events, understanding how businesses react to near-misses becomes increasingly essential. The study’s findings suggest that companies might go through cycles of overreaction and adjustment as they encounter more climate-related close calls.

“We’re likely to see more of this behavior as climate change creates more near-miss events,” says Matray. “The challenge will be helping businesses develop consistent, rational responses rather than lurching between complacency and overcorrection.”

Beyond Hurricanes

While the study focused on hurricanes, its implications extend to other types of climate risks. The researchers found similar patterns when examining how U.S. companies in earthquake-prone areas responded to major earthquakes in different countries – suggesting the phenomenon isn’t limited to any particular type of natural disaster.

This broader application is particularly relevant as businesses face an expanding array of climate-related risks, from flooding and wildfires to heat waves and drought. The tendency to overreact to near-misses could affect corporate decision-making across multiple dimensions of climate adaptation.

Finding the Right Balance

The study’s findings point to several practical implications for business leaders and investors:

1. Develop systematic risk assessment procedures that rely on data rather than recent events
2. Create institutional memory around near-miss events to avoid repeating overreactions
3. Consider the full cost of defensive measures, including opportunity costs
4. Maintain consistent risk management policies rather than reactive adjustments

“The key is building robust risk management systems that can withstand the emotional impact of near-miss events,” suggests Adrien Matray. “This means having clear protocols before disasters strike, rather than making major adjustments in their aftermath.”

Looking Ahead

As climate change continues to reshape the risk landscape for businesses, understanding and managing behavioral biases in corporate decision-making becomes increasingly crucial. The study provides valuable insights into how companies might better navigate this challenge.

The research also raises important questions about how businesses can maintain appropriate levels of climate risk preparation without falling into patterns of overreaction and correction. Finding this balance will be essential as organizations adapt to an increasingly uncertain climate future.

“The goal isn’t to ignore near-miss events,” concludes Matray, “but to learn from them while maintaining a rational, data-driven approach to risk management. That’s the sweet spot companies need to find.”

In an era of accelerating climate change, achieving that balance may prove to be one of the most important challenges facing business leaders in the decades ahead.

Disclaimer: This article discusses the “Near-Miss Effect” and how businesses respond to climate risks, based on research by Adrien Matray and Olivier Dessaint. The insights presented are for informational purposes only and should not be construed as professional advice. Readers are encouraged to consult experts when making decisions related to climate risks or corporate strategies. The views expressed in the article do not necessarily represent those of any specific company or institution.

Published by Anne C.