Earthquake vulnerability reduction program in Colombia : a probabilistic cost-benefit analysis

Cost-benefit analysis is a standard tool for determining the efficiency of planned projects. But one of the major difficulties in risk mitigation investments is that benefits are by nature uncertain. In this context, the standard approach relying on the average value of benefits may provide an incomplete picture of the efficiency of the risk mitigation project under consideration. This paper presents a probabilistic cost-benefit analysis relying on a catastrophe risk model. It produces risk metrics such as the exceedance probability curve of the benefit-cost ratio, thus providing the decisionmaker with a more complete risk analysis of the net benefits of the project. This is illustrated with the earthquake vulnerability reduction project in Colombia.Insurance&Risk Mitigation,Investment and Investment Climate,Banks&Banking Reform,Natural Disasters,Non Bank Financial Institutions

Investment Model Uncertainty and Fair Pricing

Modern investment theory takes it for granted that a Security Market Line (SML) is as certain as its "corresponding" Capital Market Line. (CML). However, it can be easily demonstrated that this is not the case. Knightian non-probabilistic, information gap uncertainty exists in the security markets, as the bivariate "Galton's Error" and its concomitant information gap proves (Journal of Banking & Finance, 23, 1999, 1793-1829). In fact, an SML graph needs (at least) two parallel horizontal beta axes, implying that a particular mean security return corresponds with a limited Knightian uncertainty range of betas, although it does correspond with only one market portfolio risk volatility. This implies that a security' risk premium is uncertain and that a Knightian uncertainty range of SMLs and of fair pricing exists. This paper both updates the empirical evidence and graphically traces the financial market consequences of this model uncertainty for modern investment theory. First, any investment knowledge about the securities risk remains uncertain. Investment valuations carry with them epistemological ("modeling") risk in addition to the Markowitz-Sharpe market risk. Second, since idiosyncratic, or firm-specific, risk is limited-uncertain, the real option value of a firm is also limited-uncertain This explains the simultaneous coexistence of different analyst valuations of investment projects, particular firms or industries, included a category "undecided." Third, we can now distinguish between "buy", "sell" and "hold" trading orders based on an empirically determined collection of SMLs, based this Knightian modeling risk. The coexistence of such simultaneous value signals for the same security is necessary for the existence of a market for that security! Without epistemological investment uncertainty, no ongoing markets for securities could exist. In the absence of transaction costs and other inefficiencies, Knightian uncertainty is the necessary energy for market trading, since it creates potential or perceived arbitrage (= trading) opportunities, but it is also necessary for investors to hold securities. Knightian uncertainty provides a possible reason why the SEC can't obtain consensus on what constitutes "fair pricing." The paper also shows that Malkiel's recommended CML-based investments are extremely conservative and non-robust.capital market line, security market line, beta, investments, decision-making, Knightian uncertainty, robustness, information-gap, Galton's Error, real option value

Stochastic Risk vs. Policy Oriented Uncertainties: The Case of the Alpine Crossings

This paper focuses on uncertainties in traffic forecasting. Three major sources of uncertainties are observed for freight demand models. The first one is the model specification itself. We are not interested by it. The second one concerns uncertainties over forecasting hypotheses. A mean to control such uncertainties lies in the introduction of risk in the Costs Benefits Analysis (CBA). Two directions have been taken by this research. The first one is the theoretical framework of CBA under uncertainty mainly developed after Dixit and Pindyck (1994). The second one is more empirical and uses Monte Carlo simulations. Major results of these researches are presented. Then, we apply them to a large transport investment simulation. These tools cannot be used for all kinds of uncertainties. The second part of this paper deals with the third source of uncertainties i. e. policy oriented uncertainties. For them, previous methods are useless. The current Alpine crossings context shows that transport policy is a major determinant of traffics. Furthermore, long term forecasting cannot exclude the possibility of changes in transport policy. This uncertainty should be controlled. It is the role of strategic modeling.risk ; uncertainty ; traffic forecasting ; Monte Carlo simulation ; transport policy ; Strategic models ; Alpine crossings

A systematic method of project selection based on risk and return criteria and according to the mean-semi-deviation behavioral hypothesis

The uncertain problem of Industrial project selection is the topic of discussion in this article. As the unrealistic assumption of certainty is relaxed in this problem, the decision maker is faced with a two-criterion decision model in which justifying between Risk and Return are the main concerns. The concept of Risk has been revised and the “Semi-Deviation” measure has been proposed to represent the risk of a project. Based on the new Mean-Semi-deviation Behavior, and according to Utility and Modern Portfolio theories, a more efficient method of project evaluation will be presented

Industry views on water resources planning methods – prospects for change in England and Wales

This paper describes a qualitative study of practitioner perspectives on regulated water resources planning practice in England and Wales. The study focuses on strengths and weaknesses of existing practice and the case for change towards a risk-based approach informed by stochastic modelling assessments. In-depth, structured interviews were conducted to capture the views of planners, regulators and consultants closely involved in the planning process. We found broad agreement that the existing water availability assessment methods are fallible; they lack transparency, are often highly subjective and may fail to adequately expose problems of resilience. While most practitioners believe these issues warrant a more detailed examination of risk in the planning process, few believe there is a strong case for a fundamental shift towards risk-based planning informed by stochastic modelling assessments. The study identifies perceived business risks associated with change and exposes widespread scepticism of stochastic methods

Overview of project appraisal

This paper is the outcome of Australian, state and territory governments agreeing to consult to develop a more sophisticated and consistent framework to assess and evaluate major infrastructure projects. Introduction A project appraisal process helps a government make good choices in terms of its goals. It starts with a clear understanding of the role of the project in addressing the key problems preventing achievement of goals specified in a broader integrated transport and land use plan. Projects should ideally be targeted at addressing the most important problems identified in broader transport plans. Good project appraisal also requires the full exploration of reform and investment options to address the key problems to ensure that the project solution provides the best return for society’s scarce resources. Cost–benefit analysis (CBA) is the primary appraisal tool at the options assessment and project prioritisation stages of the appraisal process It is a rigorous, transparent, quantitative method that measures the degree to which individual projects generate net benefits (benefits minus costs) across Australia, and allows comparison and ranking of options and projects. CBA sits within a broader planning and appraisal framework designed to ensure that projects: Flow from good strategic-level planning and assessment Are closely aligned with high-level national, state and territory goals Are aimed at addressing priority problems that are preventing goals from being achieved, and Adopt the best solution, based on a sound assessment of a wide range of potential options for solving the identified problems. The best practice transport planning and appraisal framework in Australia is defined jointly by the National guidelines for transport system management in Australia (NGTSM 2006) and Infrastructure Australia’s Better infrastructure decision-making (IA 2013a). The NGTSM is currently being updated and revised to: Align with Infrastructure Australia’s framework and guidelines Incorporate the complementary Austroads Guide to Project Evaluation and Guide to Road Transport Planning Provide guidance on important recent developments in tools and techniques that have significant implications for future approaches to transport planning and project appraisal. These include: wider economic benefits (WEBs), productivity metrics, real options analysis, use of computable general equilibrium models, and CBA of active travel, climate change adaptation, maintenance and non-infrastructure initiatives. Non-infrastructure initiatives covers regulatory changes, intelligent transport system projects, and travel behaviour change programs, and be published as website. The NGTSM covers all land transport modes. It sets out a comprehensive framework for integrated transport and land use planning and analytical approaches to transport project appraisal (mostly CBA). The NGTSM update will build on the non-CBA aspects of transport appraisal contained in the current guidelines, particularly the upfront integrated transport and land use aspects of the framework. This paper outlines first the broader appraisal process in which CBA sits, and second CBA itself with the recent developments of wider economic benefits and productivity metrics. &nbsp

An Assessment of PIER Electric Grid Research 2003-2014 White Paper

This white paper describes the circumstances in California around the turn of the 21st century that led the California Energy Commission (CEC) to direct additional Public Interest Energy Research funds to address critical electric grid issues, especially those arising from integrating high penetrations of variable renewable generation with the electric grid. It contains an assessment of the beneficial science and technology advances of the resultant portfolio of electric grid research projects administered under the direction of the CEC by a competitively selected contractor, the University of California’s California Institute for Energy and the Environment, from 2003-2014

Risk Analysis in Investment Appraisal

The methodology and uses of Monte-Carlo simulation technique are presented as applied to the analysis and assessment of risk in the evaluation of investment projects. The importance of risk analysis in investment appraisal is highlighted and the stages in the process introduced. The results generated by a risk analysis application are interpreted, including the investment decision criteria and measures of risk based on the expected value concept. Conclusions are drawn regarding the usefulness and limitations of risk analysis in investment appraisal.risk analysis; investment appraisal; Monte Carlo simulation; project evaluation; measures of risk; investment decision criteria