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Risk, Uncertainty. BUSH 689.601 September 4, 2006. Variation. Uncertainty. Real inter-individual difference. Lack of statistical or scientific knowledge concerning some risk-related characteristics. B. A. C. Response. Response. Response. A. B. -. +. A. B. Dose. Dose. Dose.

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Risk uncertainty

Risk, Uncertainty

BUSH 689.601

September 4, 2006

Risk and Public Policy


Variation

Uncertainty

Real inter-individual difference

Lack of statistical or scientific knowledge concerning some risk-related characteristics

B

A

C

Response

Response

Response

A

B

-

+

A

B

Dose

Dose

Dose

Variability and Knowing Cause and Effect

Risk and Public Policy


Classical risk analysis
Classical Risk Analysis

  • Risk can be clearly defined

    • Garrick and Kaplan’s “triplets”

    • Impacts can be clearly specified

      • Agreement on what impacts are

      • Agreement on value of impacts

    • Probabilities can be bounded

  • The Engineering Approach to risk analysis

Risk and Public Policy


Sources of uncertainty
Sources of Uncertainty

  • Statistical variation

  • Systematic error and subjective judgment

  • Linguistic imprecision

  • Variability

  • Inherent randomness

  • Disagreement

  • Approximation

Risk and Public Policy


Evolution of uncertainty over time
Evolution of Uncertainty Over Time

Risk and Public Policy


Decision analysis

Outcome

Payoff

p2a1

Event 2a

Choice a

v1

p1a

p2a2

Event 1

v2

Choice b

Event 2b

p2b1

p1b

v3

p2b2

v4

Decision Analysis

Risk and Public Policy


Anticipated

Intelligence

Value

Produces

Confession

0.9

10

Rendition

and torture

Procedural

Choice

0.1

0

0.6

7

Geneva

Convention

.65 Terrorist

0.4

0

0.5

-5

Suspect

Captured

Rendition

and torture

0.5

0

.35 Innocent

0.0

-5

Geneva

Convention

1.0

0

Decisions about Interrogation of a Terrorist Suspect

Risk and Public Policy


Valuing prospective losses

Utility

WTP

WTA

Losses SQ Gains

Valuing Prospective Losses

Risk and Public Policy


Contingent Valuation (CV)

  • Measuring value of non-market goods

    • Grounded in market prices and “utility”

    • Needed for benefit/cost analyses (required by OMB)

  • CV strengths

    • Direct measures; tradeoffs, market-like, conservative

    • Heavily researched (NSF, EPA) and broadly used

  • CV vulnerabilities

    • Hypothetical; wording sensitivity; grew from controversy

    • Opposed on philosophical grounds

  • Payoff: valuable element of larger benefit/cost analysis

Risk and Public Policy


Anatomy of a CV Measure

  • Definition of the “Good” to be valued

  • Dichotomous “take it or leave it” pricing

    • Random assignment of prices; importance of the tails

  • The “payment vehicle”

    • Plausibility and avoidance of baggage

    • Preference for advisory referenda mechanisms

  • Budget reminder

  • Follow-up questions of “certainty” of willingness to pay (WTP)

  • Modeling correlates

    • Provide construct validity tests

    • Provide individual-level explanation of variance in WTP

Risk and Public Policy


Example: Addressing the Risks of Energy Imports

  • Over the next 20 years it is expected that <nuclear, crop-based and renewable resources/crop-based and renewable resources> could re-place a substantial portion of fossil fuels used currently in the US. These changes would reduce dependence on unstable sources of oil, while also reducing emissions of greenhouse gasses and other pollutants.

  • While the benefits of such research and development efforts may take many years to significantly reduce reliance on fossil fuels, the investment in the research must be made much earlier.

  • These kinds of energy research and development would be expensive, requiring new sources of funding. Suppose that a national advisory vote or referendum was held today. You could vote to advise the federal government whether to develop a new National Energy Research and Development Fund from additional fees on fossil energy use. The fees would apply to purchases of electricity and products and services that rely on coal, oil, and natural gas.

Risk and Public Policy


CV Payment Vehicle

If you were confident that this new fund would help create new energy sources and reduce US dependence on foreign oil, even if creating this National Energy Research and Development Fund would cost your household <randomly selected cost> per year in increased energy prices for such things as electricity and gasoline, would you vote for or against creating the National Energy Research and Development Fund? Keep in mind that the <repeat cost> per year that you spend on increased energy prices could not be spent on other things, such as other household expenses, charities, groceries, or car payments.

Risk and Public Policy


Measuring wtp certainty
Measuring WTP Certainty

Asking the same question in another way, suppose that a national advisory vote or referendum was held today, and you could vote to advise the federal government on whether to create a National Energy Research and Development Fund, but the fund would cost your household <repeat randomly selected cost> per year in increased energy prices. Where would you place yourself on a scale from zero to 100, where zero means you are absolutely certain that you would vote against the creation of the fund and 100 means you are absolutely certain that you would vote for it?

Risk and Public Policy


Calculating Willingness to Pay

  • Estimating a latent willingness to pay function:

    • Where x is a vector of independent variables,  is a vector of coefficients,  is a scale parameter, and e is an error term

  • WTP is inferred from “yes” votes:

    • Where t is the payment amount, and G is the distribution function for the probability

  • G is defined to permit positive and negative WTP

    • A negative WTP implies one is less well off with the creation of the ERDF by the WTP amount

Risk and Public Policy


CV Estimates of WTP for ERDF

  • Results satisfy construct validity tests

    • WTP increases with income, environmental worry, and concern about future energy supplies

    • WTP decreases with political conservatism, and is lower for women than for men

  • Split experimental design

    • The effect of inclusion of nuclear R&D is nominally negative, but statistically insignificant

    • This provides a base-line for monitoring change

  • Counting only highly certain “yes” votes (>80 certain), preliminaryaverage WTP per household is $432 per year

  • Nationally: about $48.9 billion annually

Risk and Public Policy


Willingness to Pay by Certainty

National Energy R&D Fund

1,200

1,000

800

600

Standard is 80% Certain

Household

WTP in

$ / Year

400

200

0

70%

75%

80%

85%

90%

-200

-400

Certainty

Risk and Public Policy


Challenges to qra
Challenges to QRA

  • Does model complexity permit reasoned decisions by elected decision makers?

  • How do we decide what impacts matter?

    • E.g., How do we trade security and liberty?

    • How do we decide the weights of the different dimensions of impacts?

  • Given the trajectory of uncertainty over time, how can we be confident that the QRA captures the essential elements?

  • Why should we trust the experts?

    • E.g., Complaints about radiation experts

  • Is it all really just politics?

Risk and Public Policy


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