Expected utility theory and the tyranny of catastrophic risks
AbstractExpected Utility theory is not only applied to individual choices but also to social decisions, e.g. in cost–benefit analysis of climate change policy measures that affect future generations and hence incorporate an ethical dimension. In this context the crucial question arises whether EU theory is able to deal with “catastrophic risks”, i.e. risks of high, but very unlikely losses, in an ethically appealing way. In this paper we show that this is not the case. Rather, if in the framework of EU theory a plausible level of risk aversion is assumed, a “tyranny of catastrophic risk” (TCR) emerges, i.e. project evaluation is dominated by the catastrophic event. Or, contrary to that, with low degrees of risk aversion, the catastrophic risk eventually has no impact at all (“negligence of catastrophic risk” (NCR)) which is ethically not acceptable as well.
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Bibliographic InfoArticle provided by Elsevier in its journal Ecological Economics.
Volume (Year): 77 (2012)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/ecolecon
Expected Utility Theory; Catastrophic risks;
Other versions of this item:
- Buchholz, Wolfgang & Schymura, Michael, 2010. "Expected Utility theory and the tyranny of catastrophic risks," ZEW Discussion Papers 10-059, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
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- Thomas Michielsen, 2013. "Environmental Catastrophes under Time-Inconsistent Preferences," Working Papers 2013.55, Fondazione Eni Enrico Mattei.
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