Risk

Risk and Decision Making

Many organizations are expected or required to conduct risk assessments to show that decisions have been reached based on information about likely hazards and the size of those hazards. Nevertheless, there is a gulf between the quantification of risk and a decision about the proper course of action. In the field of pollution control, quantitative risk assessment (QRA) has been used to tabulate and compare risks. Like all risk assessments, QRA has a valuable role in showing errors in intuitive responses and supplying information to decision makers. However, QRA was also promoted as a means of determining, from comparison with other risks, what degree of exposure would be publicly acceptable. QRA failed in this role because public response does not closely follow the predictions so produced. Research on public perception of risk suggests that people distinguish between risks for qualitative, not just quantitative, reasons.

Shared Beginnings

Decisions about risk depend not only on quantification of the exposure to adverse outcomes but also on quantification of potential gains. Expectancy value is calculated to reflect the likelihood of making a loss, the size of the likely loss, the likelihood of a potential gain, and the size of the likely gain. However, theorists of probability in the context of gaming have long appreciated that in any decision about which risks to take there is also an added factor of risk aversion. The appropriate decision will depend on the level of the decision maker's aversion to risk in the particular circumstances of the gamble. Differing levels of risk aversion are neither logical nor illogical but a matter of preference. The practice of commercial insurance depends on risk aversion, since in economic terms the expectancy value of an insurance contract will be negative.

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