Decision Science and Social Risk Management: A Comparative Evaluation of Cost-Benefit Analysis, Decision Analysis, and Other Formal Decision-Aiding Approaches

343 Pages·1986·22.88 MB·English

by  Miley W. Merkhofer (auth.)

Decision Science and Social Risk Management
In addition to its French and Italian origins, the English
word risk has two other possible derivations which are
interesting to contemplate: the Vulgar Latin word
resecum, meaning danger, rock, risk at sea, and the
Creek word rhiza, cliff, through the meaning "to sail
round a cliff" Though unattested, these classical sources
are appealing to the editors for the visual image they
evoke: Ulysses and his men making their perilous voyage
between Scylla and Charybdis in the Strait of Messina.
Technology, Risk, and Society
An International Series in Risk Analysis
Editors:
Vinccnt T. Covello, National Science Foundation, Washington, D. c.,
US.A.
Jeryl Mumpower, State University ofNew York, Albany, US.A.
Stuart F. Spicker, School of Medicine, University of Connecticut Health
us.A.
Center, Farmington,
International A dvisory Board:
Berndt Brehmer, l'sykologiska Institutionen. Uppsala Universitet, Sweden
Timothy O'Riordan. Schnol ofEllvironmelllal Studies, University olLasl Anglia, Uniled
Kingdom
Henrique Machado-lorge, S. and T Resources Survey and Analysis Service, lNICT, Lishoa,
Portugal
Giancarlo Pinchera, ENEA-Direzioni Celllrale Studi, Roma, ftaly
Saburo Ikeda, Institute ofSocio-Ecollomic l'lal1ning, University of Eukuha, lapan.
Francis Fagnani, Centre d'Etude sur I'Evaluatiol1 de la Protection dans le f)omail1e Nudeaire
(CEPN), Fontenay-aux-Roses, Francc
lan Burton, Institute jär Environmental Studie,I', University of Toronto, Canada
B. Bowonder, Center jär Energy, Lnvironment, and Technology, Administrative StaffCollel(e
of fndia, Hyderahad, India
Howard Kunreuther, Department ofDecisioll Seien ces, The WlulTlon Schoo/, Unil'ersity of
Pennsylvania, Philadelphia, U.S.A.
Robert Kates, Center for Technology, Environment, and Deve!opment, C!ark Universit)',
Worcester, U.S.A.
Ortwin Renn, KFA, l'rogramml(ruppe Kernenogie und Umwelt, .lulich, West GermIlIz)'
Herbert Paschen, Ahtei/wzgjilr Angewandte Systemanalyse, Gesellschaft/ilr Kemforschz.IIll(
GmbH, Karlsrulze, West Germany
Pieter lan M. Stallen, Centre /är Technology alld Policy Studies (TNO) Netherlands
Urganization jär Applied Scientific Research, Apeldoorn, fhe Netherlands
Kristin Shradcr-Frechctte, Departmelll 0fPlzilosophy. UI/iversily of Florida, Gail1esville,
U.S.A.
Miley W. Merkhofer
Applied Decision Analysis, [ne.
Decision Science and
Social Risk Management
A Comparative Evaluation of Cost-Benefit Analysis,
Decision Analysis, and Other Formal Decision-Aiding
Approaches
D. Reidel Publishing Company
A MEMBER OF THE KLUWER ACADEMIC PUBLISHERS GROUP
Dordrecht / Boston / Lancaster / Tokyo
Libral')' 01 Congress Calliloging-in-Publication Data
Merkhofer, Mi1ey W .. 1947-
Decision scicnce and social risk managemen\.
(Teehnology. risk. and society)
Bibliography: p.
Includes index.
\. Polie)" sciences. 2. Decision-making. 3. COSt er
fectiveness. 4. Social choiee. l. Tille. 11. Scries.
H97.M45 1986 361.6'1'068 86--25966
ISBN-\3: 978-94-010-8589-2 e-ISBN-13: 978·94-009-4698-9
001: 10.1007/978-94-009-4698-9
Pubhshcd by D. Reidcl Publishing Compan)".
r.o. ßu.\ 17. JJOO AA Dordrechl. Holland.
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All Righls Rcsen:L-d
IC 1987 by D. Reidel Publishing Company.
50ftcover reprint of thc hardcover Ist edition 1987
No part of the material pTutcclcd hy this copyright nolice muy be reprwuccd or
utilized in any furm nr hy any means. cleclmnic or mcehanieal
including photocopying. recording or by an}' information storage and
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Contents
PREFACE Xl
ABBREVIATIONS XV
1. SOCIAL RISK MANAGEMENT 1
Nature of Risk 1
Meaning of Risk 1
Character of Existing Risks 4
Components of the Risk-Generation Process 6
llazards 7
E~ru~ 8
Effects 9
The Role of Government in Risk Management 10
Arguments for Regulation 10
Government Roles and Alternatives for Risk Regulation 13
Complexity of Social Risk Decision Making 16
Limited Knowledge 16
llazards 16
Exposures 17
Effects 19
Impact of Regulatory Actions 20
Risk Perception 20
Social Consent 23
The Existing Risk-Management System 25
Participants 25
Congress 25
Regulatory Agencies 27
Courts 31
Federalliealth and Safety Regulations and Related
Government Initiatives 34
Balancing Statutes 37
Technology-Only Statutes 39
llealth-Only Statutes 41
Executive Orders and Legislative Proposals 42
A Taxonomy of Risk Problems 47
v
vi Contents
2. DECISION-AIDING APPROACHES 54
Nature of Decision-Aiding Approaches 54
Definition of a Decision-Aiding Approach 55
Objective versus Subjective ProbabiIity 56
Characteristics Common to All Approaches 57
Decomposition 57
Modeling 58
Iteration 58
Quan tification 59
Decision-Making Theories 59
Cost-Benefit Theory 60
Decision Theary 63
Social Choice Theory 65
Differences among Decision-Making Theories 68
Decision-Aiding Approaches 69
Cost-Benefit Analysis Approaches 70
Decision Analysis Approaches 71
Applied Social Welfare Theary Approaches 72
A Comparison of thc Procedures Used in Decision-Aiding
Approaches 73
Specifying and Characterizing Alternatives 76
Decision Criteria 78
Outcome Variables 80
Valuing Outcome Variables 82
Market-Based Procedures 82
U tility-Based Procedures 88
Valuing Human Life 98
Valuing Outcomes over Time 99
Models 102
Models for Characterizing the Source of Risk 106
Models far Exposure Processes 109
Models far Effects Processes 113
Cost Models 116
Procedures far Quantifying Uncertainty 117
Procedures Adopting an Objective View of Probability 117
Procedures Adopting a Subjective View of Prob ability 121
Procedures for Developing Probability Distributions of
Decision Outcomes 127
Characterizing and Distinguishing Decision-Aiding
Approaches 133
3. CRITICISMS AND LlMlTATIONS OF DECISION-AID-
ING APPROACHES 142
Fundamental Criticisms 142
Contents vii
lmpossibility of Finding a Socially Optimal Decision Rule 143
Destruction through Decomposition 144
lnherent Incompleteness 146
lnability to Account for the Costs of lrreversibility 147
Operational Criticisms 148
Omissions and Inaccuracies 149
Difficulty of Measuring Benefits and Costs 152
Assessment, Modeling, and Analysis Bias 159
Propensity Toward lnterference by the Analyst 163
Susceptibility to Manipulation 165
Susceptibility to Misuse and Misinterpretation 167
lnstitutional and Politicallncompatibilities 168
Incompatibility with Principles of Democratic Decision
Making 168
Incompatibility with Constitutional and Legal Principles 170
Incompatibility with Organizational Structure and
Processes 173
Incompatibility with Social Norms 175
Ethical Concerns 180
Conflicts with Distributional Equity 181
Intergenerational Concerns 183
Promotion of Anthropocentric Values 184
4. COMPARATIVE EVALUATION: SUMMARY AND
CONCLUSIONS 187
Criteria for Evaluating Decision-Aiding Approaches 187
Role and Professed Value of Approaches 188
Evaluation Criteria 189
Comparative Evaluation 192
Logical Soundness 195
Completeness 195
Accuracy 196
Practicality 197
Acceptability 197
Selecting a Decision-Aiding Approach 199
Concluding Observations and Comments 200
NOTES 204
REFERENCES 213
APPENDICES: APPLICAT IONS OF DECISION-AIDING
APPROACHES 229
viii Contents
A. A Cost-Benefit Analysis of Mobile-Source Sulfur Oxide
Emission Control 231
Decision Situation 231
Background 231
Analysis 232
Specification and Characterization of Alternatives 232
Decision Criterion 232
Outcome Measures 233
Estimation of Costs 233
Estimation of Benefits 234
Ambient Concentrations of S04 235
Impact on Health 243
Impact on Visibility 249
Valuation of Benefits 251
Valuing Health Effects 251
Valuing Visibility 253
Sensitivity Analysis of Benefit Estimates 255
Cost-Benefit Comparison 257
Epilogue 257
Notes to Appendix A 258
References to Appendix A 260
B. ADecision Analysis of Alternative Government Policies for
Commercial Cryptography 262
Decision Situation 262
Background 262
Analysis 264
Specification and Characterization of Alternatives 265
Decision Criterion 265
Outcome Measures 265
Deterministic Analysis 270
Decision Model 270
Base-Case Model Results and Sensitivity Analysis 277
Probabilistic Analysis 281
Crypto Product Attractiveness 282
Computer-Related Crime Rate 284
Social Contingency Scenario 285
Tree Analysis 285
Solution of the Decision Tree 289
Informational Analysis 293
Epilogue 294
Notes to Appendix B 295
References to Appendix B 296
C. An Application of Applied Social Welfare Theory to a
Space-Mission Planning Decision 298
Decision Situation 298
Background 298
Analysis 302
Specification and Characterization of Alternatives 302
Decision Criteria 304
Rank Sum Collective Choice Formulation 304
Nash Bargaining Model Formulation 304
Social Welfare Formulation 306
Supradecision-Maker Formulation 307
Derivation of Science Team Preferences 308
Collective Choice Analysis 312
Rank Sum Choice Formulation 312
N ash Bargaining Model F ormulation 312
Social Welfare F ormulation 313
Supradecision-Maker Formulation 314
Comparison of Results 315
Epitogue 317
N otes to Appendix C 318
References to Appendix C 319
INDEX OF NAMES 321
INDEX OF SUBJECTS 325
Preface
Economists, decision analysts, management scientists, and others have
long argued that government should take a more scientific approach to
decision making. Pointing to various theories for prescribing and rational
izing choices, they have maintained that social goals could be achieved
more effectively and at lower costs if government decisions were routinely
subjected to analysis. Now, government policy makers are putting decision
science to the test. Recent government actions encourage and in some
cases require government decisions to be evaluated using formally defined
principles 01' rationality. Will decision science pass tbis test? The answer
depends on whether analysts can quickly and successfully translate their
theories into practical approaches and whether these approaches promote
the solution of the complex, highly uncertain, and politically sensitive
problems that are of greatest concern to government decision makers. The
future of decision science, perhaps even the nation's well-being, depends
on the outcome.
A major difficulty for the analysts who are being called upon by
government to apply decision-aiding approaches is that decision science
has not yet evolved a universally accepted methodology for analyzing
social decisions involving risk. Numerous approaches have been proposed,
including variations of cost-benefit analysis, decision analysis, and applied
social welfare theory. Each of these, however, has its limitations and
deficiencies and none has a proven track record for application to govern
ment decisions involving risk. Cost-benefit approaches have been exten
sively applied by the government, but most applications have been for
decisions that were largely risk-free. Various decision analysis approaches
have been used to aid risky business decisions, but not often for social
decisions. AIthough numerous applied social welfare theory approaches
have been proposed, only in a few instances have they been tried in real
decision-making situations.
The lack of a single, well-tested, and universally appropriate method for
analyzing adecision makes the selection of a decision-aiding approach a
question of considerable importance. Because the main approaches differ
fundamentally in their strengths and weaknesses, the value of analysis
depends on the degree to which the selected approach matches the needs
xi