IDEAS home Printed from
   My bibliography  Save this paper

Catastrophic Risk Evaluation


  • L. Ekenberg
  • M. Boman
  • J. Linnerooth-Bayer


A body of empirical evidence has shown that many managers would welcome new ways of highlighting catastrophic consequences, as well as means to evaluating decision situations involving high risks. When events occur frequently and their consequences are not severe, it is relatively simple to calculate the risk exposure of an organisation, as well as a reasonable premium when an insurance transaction is made. The usual methods rely on variations of the principle of maximising the expected utility (PMEU). When, on the other hand, the frequency of damages is low, the situation is considerably more difficult, especially if catastrophic events occur. When the quality of estimates is poor, e.g., when evaluating low-probability/high-consequence risks, the customary use of quantitative rules together with overprecise data could be harmful as well as misleading. This work extends the risk evaluation process by the integration of procedures for handling vague and numerically imprecise probabilities and utilities. The shortcomings of PMEU, and of utility theory in general, can in part be compensated for by the introduction of risk constraints. We point out some problematic features of the evaluations performed using utility theory. We also criticise the demand for precise data in situations where none is available. As an alternative to traditional models, we suggest a method for the evaluation of risks when the information at hand is numerically imprecise. The method includes procedures that allow for interval statements and comparisons, and thereby it does not require the use of numerically precise statements of probability, cost, or utility in a general sense. In order to attain a reasonable level of security, and because it has been shown that managers tend to focus on large negative losses, it is argued that a risk constraint should be imposed on the analysis. The strategies are evaluated relative to a set of such constraints considering how risky the strategies are.

Suggested Citation

  • L. Ekenberg & M. Boman & J. Linnerooth-Bayer, 1997. "Catastrophic Risk Evaluation," Working Papers ir97045, International Institute for Applied Systems Analysis.
  • Handle: RePEc:wop:iasawp:ir97045

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    2. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    3. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
    4. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-563, June.
    5. Luce, R Duncan & Krantz, David H, 1971. "Conditional Expected Utility," Econometrica, Econometric Society, vol. 39(2), pages 253-271, March.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wop:iasawp:ir97045. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.