Frequency‐Cost Curves and Derivative Risk Profiles

Stuart G. Reid

Risk Analysis, 1987, vol. 7, issue 2, 261-267

Abstract: Frequency‐cost curves (used to describe risks and to prescribe limits on “acceptable risks”) are examined with regard to their information content. Frequency density functions, expected cost density functions and cumulative expected cost distribution functions (analogous to probability distribution functions) are proposed to describe explicitly the distributions of frequency and expected cost which are implicit in frequency‐cost curves. It is shown that frequency‐cost curves can conceal rare catastrophic events that are critically important with regard to expected costs. Therefore, curves of frequency density, expected cost density, and cumulative expected cost are recommended (instead of frequency‐cost curves) for the description of risks.

Date: 1987
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https://doi.org/10.1111/j.1539-6924.1987.tb00986.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:riskan:v:7:y:1987:i:2:p:261-267

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