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Economic (Ir)Rationality In Risk Analysis

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  • HANSSON, SVEN OVE

Abstract

Mainstream risk analysis deviates in at least two important respects from the rationality ideal of mainstream economics. First, expected utility maximization is not applied in a consistent way. It is applied to endodoxastic uncertainty, i.e. the uncertainty (or risk) expressed in a risk assessment, but in many cases not to metadoxastic uncertainty, i.e. uncertainty about which of several competing assessments is correct. Instead, a common approach to metadoxastic uncertainty is to only take the most plausible assessment into account. This will typically lead to risk-prone deviations from risk-neutrality. Secondly, risks and benefits for different persons are added to form a total value of risk. Such calculations are used to support the view that one should accept being exposed to a risk if it brings greater benefits for others. This is in stark contrast to modern Paretian welfare economics, that refrains from interindividual comparisons and does not require people to accept a disadvantage because it brings a larger advantage for others.

Suggested Citation

  • Hansson, Sven Ove, 2006. "Economic (Ir)Rationality In Risk Analysis," Economics and Philosophy, Cambridge University Press, vol. 22(2), pages 231-241, July.
    • Handle: RePEc:cup:ecnphi:v:22:y:2006:i:02:p:231-241_00
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    Cited by:

    1. Carlsen, H. & Dreborg, K.H. & Godman, M. & Hansson, S.O. & Johansson, L. & Wikman-Svahn, P., 2010. "Assessing socially disruptive technological change," Technology in Society, Elsevier, vol. 32(3), pages 209-218.
    2. Krężołek Dominik & Trzpiot Grażyna, 2020. "Risk Management on the Metals Market," Econometrics. Advances in Applied Data Analysis, Sciendo, vol. 24(2), pages 86-97, June.

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