A Rational Decision Rule with Extreme Events

Marcello Basili

Risk Analysis, 2006, vol. 26, issue 6, 1721-1728

Abstract: Risks induced by extreme events are characterized by small or ambiguous probabilities, catastrophic losses, or windfall gains. Through a new functional, that mimics the restricted Bayes‐Hurwicz criterion within the Choquet expected utility approach, it is possible to represent the decisionmaker behavior facing both risky (large and reliable probability) and extreme (small or ambiguous probability) events. A new formalization of the precautionary principle (PP) is shown and a new functional, which encompasses both extreme outcomes and expectation of all the possible results for every act, is claimed.

Date: 2006
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https://doi.org/10.1111/j.1539-6924.2006.00826.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:riskan:v:26:y:2006:i:6:p:1721-1728

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