An Axiomatic Approach to Choice Under Uncertainty with Catastrophic Risks

An axiomatic approach to choice under uncertainty with catastrophic risks

Resource and Energy Economics ◽

10.1016/s0928-7655(00)00032-4 ◽

2000 ◽

Vol 22 (3) ◽

pp. 221-231 ◽

Cited By ~ 83

Author(s):

Graciela Chichilnisky

Keyword(s):

Axiomatic Approach ◽

Choice Under Uncertainty ◽

Catastrophic Risks

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Asteroids: Assessing Catastrophic Risks

Journal of Probability and Statistics ◽

10.1155/2010/954750 ◽

2010 ◽

Vol 2010 ◽

pp. 1-15 ◽

Cited By ~ 11

Author(s):

Graciela Chichilnisky ◽

Peter Eisenberger

Keyword(s):

Global Warming ◽

Expected Value ◽

Equal Treatment ◽

Distant Future ◽

Von Neumann ◽

Choice Under Uncertainty ◽

Realistic Approach ◽

Catastrophic Risks ◽

Expected Values ◽

New Criterion

We evaluate two risk profiles: (i) global warming risks and (ii) collisions with asteroids that can cause the extinction of our species. The expected values computed for these two risks suggest that no action will be taken to avoid extinction. The result is somewhat counterintuitive, but it is typical of the results of using classic decision theory to evaluate catastrophic risks in the distant future, see the study by Posner (2004). We establish why expected value is insensitive to catastrophic risks see the study by Chichilnisky (1996), and use another criterion to evaluate risk based on axioms for choice under uncertainty that update the classic Von Neumann theory and require equal treatment for rare and frequent events. Optimizing according to the new criterion is shown to be equivalent to optimizing expected utility with a restriction on the worst outcome in the case of a catastrophe. The evaluation obtained from the new criterion seems more intuitively plausible, and suggests a more practical and realistic approach to catastrophic risks: optimizing expected value while minimizing losses in the case of a catastrophe.

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