A Bridge Where Decision Theory Meets Risk Analysis

AN ARTICLE BY BORGONOVO, CAPPELLI, MACCHERONI AND MARINACCI ESTABLISHES A LINK BETWEEN RISK ANALYSIS AND DECISION THEORY

On January 28, 1986, the space shuttle Challenger exploded 73 seconds after take off at the Kennedy Space Center, Florida. B. John Garrick was one of the experts that contributed to the official accident report. His recommendations influenced NASA’s decision to adopt a more informed approach to risk analysis.
 
Five years before that, B. John Garrick had laid with Stanley Kaplan the foundations for risk analysis for nuclear power plants. Their article On the Quantitative Definition of Risk, which appeared in the first issue of Risk Analysis, is a milestone in risk-informed decision making. According to Kaplan and Garrick, risk analysis consists of an answer to three questions: what can happen? How likely is that it will happen? If it does happen, what are the consequences?
 
In a recent article, Emanuele Borgonovo, Veronica Cappelli, Fabio Maccheroni and Massimo Marinacci establish a formal link between risk analysis and decision theory, that is, the study of the reasoning underlying an agent’s choice during a decision-making process involving incomplete information. “Risk analysis helps us to understand what will happen in the future and what we can do today to mitigate the risks. Decision analysis is mainly about modeling issues of decision making”, Emanuele Borgonovo says. “Until now, they were separated. We show that for every risk analysis there is a corresponding model of decision theory. In doing so, we provide risk analysis with access to the toolbox that decision theory has developed so far. At the same time, we provide decision theory with broader scope and new stimuli”.
 
There are many areas of applicability. “Any decision-maker who wants to solve a complex problem, be it the renovation of a chemical plant, space missions programming or protection against cyber attacks, can use this joint methodology to mitigate risks and identify optimal risk management options”.

Read more about this topic:
Massimo Marinacci. Understanding Risk in Companies and Our Lives
The Real Trouble Starts When We Think We Can Calculate Everything
Corporate Governance Is not Safe from Black Swans
Policy Makers React to Ambiguity Like Other Humans Do
No Economic System Is Safe. Shocks Travel Quickly and Unexpectedly
When International Trade Increases the Chance of Conflict
With the Monte Carlo simulations, an epochal revolution in the probabilistic risk assessment of business plans has arrived
How to Make Your Non-performing Loans Harmless
New Sanitation System Can Half Healthcare Associated Infections and Reduce Related Costs by 75%

by Claudio Todesco