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Risk Management – Managing Risks, not Calculating Them

Author

Listed:
  • Philip Kostov

    (Queen's University Belfast)

  • John Lingard

    (University of Newcastle)

Abstract

The expected utility approach to decision making advocates a probability vision of the world and labels any deviation from it ‘irrational’. This paper reconsiders the rationality argument and argues that calculating risks is not a viable strategy in an uncertain world. Alternative strategies not only can save considerable cognitive and computational resources, but are more ‘rational’ with view to the restricted definition of rationality applied by expected utility theorists. The alternative decision making model of risk management is presented and explained.

Suggested Citation

  • Philip Kostov & John Lingard, 2004. "Risk Management – Managing Risks, not Calculating Them," Risk and Insurance 0409001, EconWPA.
  • Handle: RePEc:wpa:wuwpri:0409001
    Note: Type of Document - pdf; pages: 21
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/ri/papers/0409/0409001.pdf
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    References listed on IDEAS

    as
    1. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    2. Kunreuther, Howard & Novemsky, Nathan & Kahneman, Daniel, 2001. "Making Low Probabilities Useful," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 103-120, September.
    3. Philip Kostov & John Lingard, 2004. "Rural Development as Risk Management," Others 0409013, University Library of Munich, Germany.
    4. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-319, June.
    5. Manski, Charles F, 1999. "Analysis of Choice Expectations in Incomplete Scenarios," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 49-66, December.
    6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    7. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    8. McFadden, Daniel, 1999. "Rationality for Economists?," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 73-105, December.
    9. Tversky, Amos & Slovic, Paul & Kahneman, Daniel, 1990. "The Causes of Preference Reversal," American Economic Review, American Economic Association, vol. 80(1), pages 204-217, March.
    10. Peltzman, Sam, 1975. "The Effects of Automobile Safety Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 677-725, August.
    11. Philip Kostov & John Lingard, 2004. "Integrated rural development - do we need a new approach?," Others 0409006, University Library of Munich, Germany.
    12. Viscusi, W Kip, 1985. "Consumer Behavior and the Safety Effects of Product Safety Regulation," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 527-553, October.
    13. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-197, December.
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    Cited by:

    1. Petrics, Hajnalka & Feher, Alajos, 2009. "The multifunctionality of agriculture and risk management as seen by Hungarian farmers involved in diversified farming," Studies in Agricultural Economics, Research Institute for Agricultural Economics, vol. 0, pages 1-13, April.

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