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Evaluating sustainability actions under uncertainty: the role of improbable extreme scenarios

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  • Christian Gollier

    (University of Toulouse-Capitole)

Abstract

An optimality condition for sustainability actions under discounted expected utility is that, ex post, we should almost surely regret having adjusted them too much for risk. In other words, ex post, one would almost surely feel regret for "excess" precautionary saving, excess insurance and hedging coverage, or for excess risk-bearing. Moreover, for marginal investments whose impacts materialize in t years, t tending to infinity, their state-contingent present value tends to zero almost surely, in spite of the fact that their expected value is one. The value of sustainable actions is thus mostly derived from very improbable extreme scenarios.

Suggested Citation

  • Christian Gollier, 2024. "Evaluating sustainability actions under uncertainty: the role of improbable extreme scenarios," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 49(1), pages 59-74, March.
    • Handle: RePEc:pal:genrir:v:49:y:2024:i:1:d:10.1057_s10713-023-00095-0
    DOI: 10.1057/s10713-023-00095-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Precautionary principle; Precautionary saving; Sustainability; Asset pricing; Extreme events;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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