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The Limits of Catastrophe Aversion

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  • Martin Peterson

Abstract

We discuss the management of catastrophe‐risks from a theoretical point of view. The concept of a catastrophe is informally and formally defined, and a number of desiderata for catastrophe‐averse decision rules are introduced. However, the proposed desiderata turn out to be mutually inconsistent. As a consequence of this result, it is argued that the ``rigid'' form of catastrophe aversion articulated by, for example, the maximin rule, the maximum probable loss rule, (some versions of) the precautionary principle, and the rule proposed in Ekenberg et al. (1997, 2000) should be given up. An alternative form of ``non‐rigid'' catastrophe aversion is considered.

Suggested Citation

  • Martin Peterson, 2002. "The Limits of Catastrophe Aversion," Risk Analysis, John Wiley & Sons, vol. 22(3), pages 527-538, June.
    • Handle: RePEc:wly:riskan:v:22:y:2002:i:3:p:527-538
    DOI: 10.1111/0272-4332.00036
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    1. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    2. L. Ekenberg & M. Boman & J. Linnerooth-Bayer, 1997. "Catastrophic Risk Evaluation," Working Papers ir97045, International Institute for Applied Systems Analysis.
    3. Howard Kunreuther, 1997. "Managing Catastrophic Risks Through Insurance and Mitigation," Center for Financial Institutions Working Papers 98-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    4. Love Ekenberg & Magnus Boman & Joanne Linnerooth-Bayer, 2001. "General risk constraints," Journal of Risk Research, Taylor & Francis Journals, vol. 4(1), pages 31-47, January.
    5. L. Robin Keller & Rakesh K. Sarin, 1995. "Fair Processes for Societal Decisions Involving Distributional Inequalities," Risk Analysis, John Wiley & Sons, vol. 15(1), pages 49-59, February.
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    1. E. Michel‐Kerjan & S. Hochrainer‐Stigler & H. Kunreuther & J. Linnerooth‐Bayer & R. Mechler & R. Muir‐Wood & N. Ranger & P. Vaziri & M. Young, 2013. "Catastrophe Risk Models for Evaluating Disaster Risk Reduction Investments in Developing Countries," Risk Analysis, John Wiley & Sons, vol. 33(6), pages 984-999, June.
    2. Altay, Nezih & Green III, Walter G., 2006. "OR/MS research in disaster operations management," European Journal of Operational Research, Elsevier, vol. 175(1), pages 475-493, November.
    3. Katsoras, Efthymios & Georgiadis, Patroklos, 2022. "An integrated System Dynamics model for Closed Loop Supply Chains under disaster effects: The case of COVID-19," International Journal of Production Economics, Elsevier, vol. 253(C).
    4. Christoph M. Rheinberger & Nicolas Treich, 2017. "Attitudes Toward Catastrophe," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(3), pages 609-636, July.
    5. Efthymios Katsoras & Patroklos Georgiadis, 2022. "A Dynamic Analysis for Mitigating Disaster Effects in Closed Loop Supply Chains," Sustainability, MDPI, vol. 14(9), pages 1-20, April.

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