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Doing Our Best: Optimization and the Management of Risk

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  • Yakov Ben‐Haim

Abstract

Tools and concepts of optimization are widespread in decision‐making, design, and planning. There is a moral imperative to “do our best.” Optimization underlies theories in physics and biology, and economic theories often presume that economic agents are optimizers. We argue that in decisions under uncertainty, what should be optimized is robustness rather than performance. We discuss the equity premium puzzle from financial economics, and explain that the puzzle can be resolved by using the strategy of satisficing rather than optimizing. We discuss design of critical technological infrastructure, showing that satisficing of performance requirements—rather than optimizing them—is a preferable design concept. We explore the need for disaster recovery capability and its methodological dilemma. The disparate domains—economics and engineering—illuminate different aspects of the challenge of uncertainty and of the significance of robust‐satisficing.

Suggested Citation

  • Yakov Ben‐Haim, 2012. "Doing Our Best: Optimization and the Management of Risk," Risk Analysis, John Wiley & Sons, vol. 32(8), pages 1326-1332, August.
    • Handle: RePEc:wly:riskan:v:32:y:2012:i:8:p:1326-1332
    DOI: 10.1111/j.1539-6924.2012.01818.x
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    References listed on IDEAS

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    1. Per Sander & Bo Bergbäck & Tomas Öberg, 2006. "Uncertain Numbers and Uncertainty in the Selection of Input Distributions—Consequences for a Probabilistic Risk Assessment of Contaminated Land," Risk Analysis, John Wiley & Sons, vol. 26(5), pages 1363-1375, October.
    2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    3. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, April.
    4. Durga Rao Karanki & Hari Shankar Kushwaha & Ajit Kumar Verma & Srividya Ajit, 2009. "Uncertainty Analysis Based on Probability Bounds (P‐Box) Approach in Probabilistic Safety Assessment," Risk Analysis, John Wiley & Sons, vol. 29(5), pages 662-675, May.
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    1. Ben-Haim, Yakov, 2021. "Feedback for energy conservation: An info-gap approach," Energy, Elsevier, vol. 223(C).

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