Citation:
Jiawei Li, Simon Pollard, Graham Kendall, Emma Soane, Gareth Davies, Optimising risk reduction: An expected utility approach for marginal risk
reduction during regulatory decision making, Reliability Engineering & System Safety, Volume 94, Issue 11, November 2009, Pages 1729–1734.
Abstract:
In practice, risk and uncertainty are essentially unavoidable in many regulation
processes. Regulators frequently face a risk-benefit trade-off since zero risk
is neither practicable nor affordable. Although it is accepted that cost-benefit
analysis is important in many scenarios of risk management, what role it should
play in a decision process is still controversial. One criticism of cost-benefit
analysis is that decision makers should consider marginal benefits and costs,
not present ones, in their decision making. In this paper, we investigate the
problem of regulatory decision making under risk by applying expected utility
theory and present a new approach of cost-benefit analysis. Directly taking into
consideration the reduction of the risks, this approach achieves marginal cost-
benefit analysis. By applying this approach, the optimal regulatory decision
that maximizes the marginal benefit of risk reduction can be considered. This
provides a transparent and reasonable criterion for stakeholders involved in the
regulatory activity. An example of evaluating seismic retrofitting alternatives
is provided to demonstrate the potential of the proposed approach. (C) 2009
Elsevier Ltd. All rights reserved.