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

Author

Listed:
  • Christian Gollier

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

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," Post-Print hal-04938804, HAL.
    • Handle: RePEc:hal:journl:hal-04938804
    DOI: 10.1057/s10713-023-00095-0
    as

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