Preferences, utility and risk perception in engineering decision making

Authors

Marc A. Maes and Michael H. Faber

Abstract

The present paper focuses on the role and the modelling of preferences in risk based decision making for engineering systems, with special emphasis on the dislike of severe consequences. This involves the use of appropriate utility models and a proper understanding of the many aspects of risk perception. The basic premise of this paper is that the risk aversion intrinsic to nonlinear utility functions can almost always be explained by the non-inclusion of indirect and 'follow-up' consequences. Several aspects of risk perception and preference ranking can be interpreted as the result of the decision maker's voluntary or involuntary unwillingness to account for consequences that are triggered by extreme losses, such as excessive business losses, loss of reputation or other indirect or so-called intangible losses.

Published in/by

Accepted for publication in: International Journal of Risk Assessment and Management, 2005, (special ed. Ross Corotis).