Decision Making for Low Probability Events: A Conceptual Framework

Recent empirical evidence from field surveys and controlled laboratory experiments reveal anomalies with respect to decisions by individuals to protect themselves against low probability, high loss events. In particular, behavior is frequently at odds with what would be predicted by standard models of choice which involve benefit-cost comparisons. This paper develops a framework for analyzing decisions for low probability events and discusses their policy implications. The framework highlights the following four interrelated components: (1) Type of information collected by individuals in making their decisions (i.e., accuracy of data on losses, probabilities and protective options); (2) The decision process of individuals (e.g., expected utility maximization, threshold models); (3) Implications of policies on specific groups (e.g., affected individuals. general taxpayers); and (4) Welfare implications (e.g., equity and efficiency considerations). Examples from studies on natural hazards, health and safety problems will be used to illustrate how this framework synthesizes descriptive models of choice with policy prescription. The paper concludes by suggesting directions for future research

Societal Decision Making for Low Probability Events: Descriptive and Prescriptive Aspects

Society has become increasingly concerned with the appropriate procedures for evaluating projects which promise to yield long-run benefits, but also create potentially catastrophe consequences. Recent examples of such problems are the siting of energy facilities such as nuclear power plants or liquefied natural gas (LNG) terminals. This paper has two principal purposes. Utilizing recent theoretical and empirical contributions to the literature on choice under uncertainty, it proposes a descriptive model as to how such decisions are reached in the United States. On the basis of this descriptive model, suggestions are made for improving the process. The paper thus attempts to integrate descriptive and prescriptive components for analyzing these societal problems

The Risk Analysis Controversy: An Institutional Perspective

Risk analysis has generated considerable controversy in recent years as to its meaning with respect to societal decision making. The papers in this book highlight different aspects of the risk debate. In particular, confidence in expert statements on risk has diminished and there has been an increasing recognition of the difference between analysis of the risk associated with an event and people's preferences/values. These concerns are articulated in the papers and discussions contained here. The volume does not provide answers to the dilemma facing society but rather raises a set of questions which need to be considered

Insuring and Managing Hazardous Risks: From Seveso to Bhopal and Beyond

This executive review describes in brief the International Conference on Transportation, Storage, and Disposal of Hazardous Materials, held at IIASA, and the ensuing Proceedings "Insuring and Managing Hazardous Risks." The Conference brought together representatives of academia, business and government from East and West to discuss the nature of current problems in the area of hazardous materials. An important objective of the Conference was to suggest steps that could be undertaken by industrial firms, the insurance industry, and government agencies to improve the safety and efficiency with which hazardous materials are produced and controlled in industrialized societies

Insuring against Country Risks: Descriptive and Prescriptive Aspects

Today multinational firms face grave uncertainties with respect to their investment strategies in other countries. This paper stresses the importance of integrating the descriptive aspects of this problem with prescriptive recommendations. It does so by raising two interrelated questions: (1) How do multinational firms and insurers deal with the problems of international risk in making their decisions on what investments to undertake? (2) What role can analytic approaches, including insurance mechanisms, play in better managing risk and uncertainty in international transactions? These questions are addressed by developing a conceptual framework which emphasizes the importance of problem formulation, institutional arrangements and decision processes as a basis for prescriptive recommendations. The problem is characterized by lack of a detailed statistical data base to estimate probabilities and consequences of different types of political, economic, and social risks. Corporate planners and risk managers who have responsibility for these investment decisions would Like concreteness. Hence, their actions appear to be greatly influenced by past experience and personal contacts. Our prescriptive recommendations are designed to widen the statistical data base by the use of experts and Bayesian analysis as well as to broaden the responsibility for investment decisions within the organization. We also propose a jointly operated US private-federal insurance program which maintains features of current government operated systems but has private firms marketing policies and settling claims. The above theoretical concepts are illustrated with a case study of Indonesia's investment evaluation problem pursuant to their decision to provide the United States with liquefied natural gas in the early 1970's. This case study illustrates the political risks of firms investing even in highly developed economies such as the United States