A rational decision rule with extreme events.
Risks induced by extreme events are characterized by small or ambiguous probabilities, catastrophic losses, or windfall gains. Through a new functional, that mimics the restricted Bayes-Hurwicz criterion within the Choquet expected utility approach, it is possible to represent the decisionmaker behavior facing both risky (large and reliable probability) and extreme (small or ambiguous probability) events. A new formalization of the precautionary principle (PP) is shown and a new functional, which encompasses both extreme outcomes and expectation of all the possible results for every act, is claimed.
Basili
Marcello
M
Department of Economics, University of Siena, Piazza San Francesco 7 53100 Siena, Italy. basili@unisi.it
D001499:Bayes Theorem; D003657:Decision Making; D003661:Decision Support Techniques; D004190:Disasters; D006801:Humans; D015233:Models, Statistical; D011336:Probability; D012306:Risk; D018570:Risk Assessment / Q000379:methods*; D013850:Thinking; D035501:Uncertainty