Risk Assessment

Does behavior that does not maximize the odds of survival illustrate the limits of human rationality, and if so, how should we proceed once we admit that individuals do not correctly react to many risks? Whether individuals correctly or rationally react to risks is clouded by many factors characterizing risk situations in addition to the odds of survival, for instance, whether the risk is taken voluntarily, whether it is controllable, and so forth. Yet even distracting from these contextual factors, the question of rational choice is not clear.

Are policy makers make decision on risk management according to how many people are concerned rather than how many people are affected? Risk choices involve life and death, and therefore inconsistency and misperceptions should not be tolerated a basis for public policy. How much more society wishes to spend to avoid catastrophic risks, or how far our social decision makers should stray from the lives saved objective, will depend on how these weights are determined. As an alternative to expert decided weights, the economist’s welfarist model dictates that the valuation depends on how much the affected individuals wish to spend. Ultimately, this means that the lives saved principle is replaced by one of citizen preference. There is a growing literature in socity that risks and the scientific discourse surrounding environmental risk issues are to an important extent socially constructed. Numerous case studies show that organized interest groups interpret the evidence on risk differently producing biased science, such as in environment issues. However it is also argued that interests are themselves grounded in social context, for example individuals choose what to fear in order to support their way of life and give more or less attentions to risk according to world views that entail deeply held values and benefits. According to research by Wildavsky and Dake, these social relations can predict risk taking preferences better than measures of knowledge of the probabilities and outcomes.

The value rule was entered into judicial interpretations of Tort Law as early as the 1920s by Judge Learned Haud, who gave the standard for negligent conduct a simple mathematical interpretation; risk is expressed as the product of probability times consequences.

The important point is that, following economic logic, policy makers can justify substantial deviations from the lives saved objective if they are based on the public’s concerns about the risk situation. Policy makers should be accountable for large disparities in public risk reducing expenditure. For well informed stakeholders even seemingly irrational or unreasonable concerns should not be dismissed as illegitimate.

Hence, as expressed by Slovic, although individuals tend to misjudge probabilities, their conceptualisation of risk is often much broader and richer than the expert’s reliance on quantitative estimates. People display extreme preferences for avoiding collective deaths, for example for reducing their risk of flying as opposed to their risk of driving.

Ref: Zeckhauser, R.J., Keeney R.L., Sebenius J.K., 1996, Wise Choices, Harvard Business Schoold Press

Wildavsky A., Dake K., ‘Theories of Risk Perception’

Economics of Environment

Destruction of environment takes place through using wrong criteria to determine production structures, through distorted consumer patterns, a waste of material resources, lack of recycling and unattributed dumping of waste products into environment.

Many peole believe that there are intrinsic values in environmetal assets. They are of value in themselves and are not of human beings, values that exist not just because individual human beings have prefernce for them. Economic valuation is essentially about discovering the demand curve for environmental goods and services: the values which human beings place on the environment. The use of money is a way that people express their preferences. Though their willingness to pay for the process of making public choices. Both values are legitimate, hence, both are relevant to decision making. Environmental assets such as tropical rain forests, ecologically precious wetlands, and endangered species have intrinsic value. The environment assets often are viewed as a luxury to be afforded later, not while the struggle for poverty alleviation is under way. Bringing discussion of rights and intrinsic values into policy dialogue appeared until today as forgoing the benefits of development. However, as resources are becoming more scarce conservation and the sustainable use of resources have become of important ‘economic value’, and of potential complements. Therefore, there is awareness raising issues to demonstrate and measure the economic value of environmental assets. Decisions are likely to be biased in favour of short term benefits because conservation benefits are not readily calculable. Unless incentives are devised whereby the non market benefits are internalised into the land use choice mechanism, conservation benefits will automatically be down graded.

Environmental damages generates costs which are not currently recorded as part of GNP, but which would be if GNP accounts were modified to reflect comprehensive measures of aggregate well being rather than economic activity. However GNP, will be affected if environment damages were avoided. Evidences are compelling that environment degradation results in appreciable losses of GNP. Soil erosion and air pollution affecting crop and forestry, health and productivity accelerates increase of damages done by pollution. Previously since environment damage cost did not show up explicitly in measures of national product, planners had no incentive to treat environmental damage as a priority in development plans. As the GNP costs of degradation are escalating and becoming substantial, environment has been entered into development plans.

Ref:
Brown R.L., 1993, State of the World, Worldwatch Institute, published in the UK by Unwin Hyman

Pearce D., 1997, Economic values and the natural world, Earthscan

Nell J.E., 1996, Making sense of a changing economy, Routledge