Decision making for group risk reduction : dealing with epistemic uncertainty

Bedford, Tim (2013) Decision making for group risk reduction : dealing with epistemic uncertainty. Risk Analysis, 33 (10). 1884–1898. ISSN 0272-4332

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Abstract

Group risk is usually represented by FN-curves showing the frequency of different accident sizes for a given activity. Many governments regulate group 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 two main problems in doing this are that the FN-curve contains multiple frequencies, 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”. Here we show it to be risk neutral, disaster averse, and insensitive to epistemic uncertainty on accident frequencies. A new approach is outlined that has a number of attractive properties. The formulation allows us to distinguish 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. Such disutilities may, for example, be used to compare the impact of system design changes on group risks, or might form the basis for valuing reductions in group risk in a cost benefit analysis.