Decision Making for Societal Risk Reduction using Multi-Criteria Analysis

Authors: Bedford Tim

Management Science Working Paper No. 15 (2005)

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Abstract

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Societal risk is usually represented by FN-curves showing the frequency of different accident sizes for a given activity. Many governments regulate societal risk through FN-criterion lines which define the tolerable location of an FN-curve. However, to compare different risk reduction alternatives one must be able to rank FN-curves. The main problems are that the FN-curve is a multidimensional risk measure, and that there are usually large epistemic uncertainties about the curve. Since the mid 1970?s a number of authors have used the concept of ?disutilty? to summarize FN-curves in which a family of disutility functions was defined with a single parameter controlling the degree of ?risk aversion?. For the first time a full normative foundation is given here, showing it to be risk neutral, disaster averse, and insensitive to epistemic uncertainty. A new multi-attribute approach is outlined that has a number of attractive properties. The formulation allows us to distinguish properly between risk aversion and disaster aversion, two concepts that have been confused in the literature until now. A two-parameter family of disutilities generalizing the previous approach is defined where one parameter controls risk aversion and the other disaster aversion. The family is sensitive to epistemic uncertainties.