Precautionary Risk Management: Dealing with Catastrophic Loss Potentials in Business, the Community and Society

181 Pages·2006·1.757 MB·English

by  Mark Jablonowski (auth.)

Precautionary Risk Management
Precautionary Risk
Management
Dealing with Catastrophic Loss Potentials in
Business, the Community and Society
Mark Jablonowski
© Mark Jablonowski 2006
Softcover reprint of the hardcover 1st edition 2006 978-0-230-01352-0
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First published 2006 by
PALGRAVE MACMILLAN
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PALGRAVE MACMILLAN is the global academic imprint of the Palgrave
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ISBN 978-1-349-28482-5 ISBN 978-0-230-62765-9 (eBook)
DOI 10.1057/9780230627659
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managed and sustained forest sources.
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Jablonowski, Mark, 1955–
Precautionary risk management : dealing with catastrophic loss
potentials in business, the community and society / by Mark Jablonowski.
p. cm.
Includes bibliographical references and index.
1. Risk management. 2. Emergency management. I. Title.
HD61.J32 2006
658.15′5–dc22 2006046010
10 9 8 7 6 5 4 3 2 1
15 14 13 12 11 10 09 08 07 06
Contents
List of Tables and Figures viii
Preface: A World of Hazards x
Acknowledgements xiii
1 Statistical Risk and its Treatment 1
1.1 Economic optimization and cost/benefit analysis 1
1.2 The nature of risk 2
1.3 Using expected values 5
1.4 Determining probabilities from data 6
1.5 Extending the credibility of statistical results 8
1.6 Uncertainty due to knowledge imperfections 12
1.7 Generalized uncertainty and the “10 percent rule” 15
2 The ABC’s of High-Stakes Decisions 17
2.1 The “iceberg” model of risk 17
2.2 Why expected value decision-making doesn’t work 20
2.3 Decisions when probabilities are unknown, or
irrelevant 22
2.4 The dilemma of precaution 25
2.5 Can precaution make things worse? 26
2.6 Modifying expected values for imperfect knowledge 28
2.7 Utility and risk aversion 31
2.8 Where does insurance fit in? 34
2.9 Fatalism, by default? 35
3 Practical Precaution 38
3.1 Is everythingrisky? 38
3.2 Defining the “precautionary region” 42
3.3 Integrating measurement uncertainty 43
3.4 Taking “reasonable” precautions 44
3.5 Protecting human life 46
3.6 The importance of proper metrics 47
3.7 Reasonable precautions and human evolution 48
3.8 Facing the limits of practicality 49
v
vi Contents
4 Precaution and Progress: Identifying Alternatives 51
4.1 A wider view of planning 51
4.2 Assessing alternatives 55
4.3 An illustrative example 56
4.4 Natural vs. man-made risk 58
4.5 Shifting the burden of proof 61
4.6 Alternatives assessment vs. post-fact risk management 63
4.7 Post-fact risk management and thestatus quo 69
4.8 The community commitment 72
5 Public Policy and the Rise of Precautionary Regulation 77
5.1 The status of precautionary regulation 77
5.2 Strict liability and man-made perils 81
5.3 Precautionary regulation and free enterprise 84
6 Science and Precaution 87
6.1 More science, not less 87
6.2 Probability, decision and the science of risk assessment 92
6.3 Exploratory modeling 96
6.4 Science and objectivity 99
6.5 Precaution and commerce 101
6.6 The developing science of precaution 102
7 Communicating about Risk 105
7.1 The meaning(s) of the word “risk” 105
7.2 The lay perception of risk 107
7.3 Effective risk communication 110
7.4 The feedback process 114
8 The Future of Risk 116
8.1 Is risk increasing? 116
8.2 Cost/benefit revisited 120
8.3 Reconciling fatalism and precaution 125
8.4 Shaping the future 129
8.5 Can we get there from here? 133
Appendix A A Working Model of Precaution 136
A.1 An introduction to fuzzy sets 136
A.2 Formalizing linguistic rules using fuzzy sets 139
A.3 Fuzzy measurement 140
A.4 Building a working model 143
Contents vii
A.5 Artificial neural networks (ANNs) and human
reasoning 143
A.6 Using the model 147
Appendix B The Precautionary Risk Manager’s Bookshelf 149
Appendix C A Concise Statement of the “Precautionary
Principle” 156
Appendix D A Glossary of High-Stakes Risk Management 157
Index 163
List of Tables and Figures
Tables
1.1 Sample Size and Estimation Error 7
3.1 The Costs of Various Public Health and Safety Actions 47
6.1 Science for Public Policy 100
Figures
1.1 The “Urn Model” of Probability 3
1.2 Averages Converge Over a Number of Trials 5
1.3 A Simple Event Tree 10
1.4 The Boundaries of Statistical Risk Treatments 16
2.1 The “Iceberg” Model of Risk 18
2.2 A Simple Risk Management Decision Matrix 19
2.3 The Catastrophe Problem 22
2.4 A Comparison of High-Stakes Decision Criteria 23
2.5 Extending the Decision to Consider “Opportunity Cost” 27
2.6 An Interval Estimate of Probability (Including “Best Guess”) 29
2.7 Disutility and Risk Aversion 31
2.8 A Weighted Probability Function 33
3.1 Identifying the “Precautionary Region” 42
3.2 The “Possibility of Risk” 44
4.1 A Dynamic View of Risk 53
4.2 The “I-A-T Model” of Risk Management 64
4.3 Benefits and Risk Potentials: What are the Alternatives? 69
4.4 Risk Management Theory vs. Reality 71
4.5 Promoting the Community Commitment to Precautionary
Alternatives Assessment 74
6.1 Hypothesis Testing: Type I Error vs. Type II Error 88
6.2 The Interface of Science and Precaution 92
7.1 Effective Risk Communication 112
8.1 Growth in US Gross Domestic Product (GDP),
1929–2004 118
8.2 Infinite Risk Aversion (at Catastrophe Level C*) 121
8.3 Factors Affecting Risk Acceptance 127
8.4 Partitioning the Probability Dimension 131
viii
List of Tables and Figures ix
8.5 The “Pros and Cons” of High-Stakes Decision Criteria 132
A.1 Fuzzy Membership Functions 138
A.2 A Fuzzy Definition of “Possibility” (i.e., “Possible Risk”) 140
A.3 Applying the Precautionary Principle 142
A.4 A Simple Neural Network Architecture 144
A.5 A ANN-Based Fuzzy Risk Assessment System 146
Preface: A World of Hazards
Today, the world in which we live brings to our attention the impor-
tance of high-stakes decisions in the management of risk. The
increasing complexity of modern systems, be they physical, eco-
nomic or social, brings with it the threat of increased risks. For a
variety of reasons, the threats we face have potential impacts greater
than ever before in history. Some of the threats themselves are
indeed “man made”, such as the disposal of industrial waste, and
political and social instabilities that promote terrorism and warfare.
Other, age old physical perils are exacerbated by industrial and social
progress, such as the development of areas prone to severe wind and
earthquake damage. Given its increasing importance, we need to
carefully re-examine the question: How do we deal with exposures
that can have tremendous, possibly catastrophic, negative impacts,
on an individual, organizational and societal level?
While we face a variety of risks in the world today, we will focus here
on what has generally been termed hazard risk. This form of risk arises
from physical properties of the world, and manifests its effects directly
onnature. Nature includes people and their property. This is in contrast
to the study of economic risks, which affect primarily financial vari-
ables. Of course, hazard risk may ultimately have financial effects. The
ruin of a business enterprise is defined in terms of financial variables,
even though physical perils in the form of hazard risk may represent
the “root cause”.
Hazard risks can themselves be classified as natural and man-made.
Natural risks include the age-old perils of fire, wind, earthquake and
flood. The modern world introduces a variety of perils produced by
man. These include the risks associated with technological progress,
including the failure of technology to function as intended, resulting
in physical harm to humans and their environment. Technological
byproducts include waste production, in the form of pollutants. Some-
times hazard risk is extended to perils that include the intentional acts
of men, for political, criminal or even psychological reasons. Terrorism
and war are among them. While these perils may to some extent be
treated as purely physical, their roots are political. Complete analysis of
these risks therefore requires use to go beyond hazard risk into the
assessment of political risk.
x