Operational Safety Economics

Chapter 4Operational Safety Decision-making and Economics

4.1 Economic Theories and Safety Decisions

4.1.1 Introduction

Making a decision is often difficult because of the uncertainties involved and the risks these uncertainties entail. A balance needs to be struck between different alternatives and the corresponding consequences. The decision therefore depends in part on how a choice problem is defined and the value that is attached to the pros and cons of an alternative. However, this involves a lot of uncertainty, as people can never be completely sure of the exact consequences of the chosen course of action [1].

Much research on decision-making has already been carried out in different disciplines. Various models and theories can be found in the literature that describe decision-making under conditions of uncertainty and which attempt to explain the phenomena observed. The first theory, developed as early as the seventeenth century, is the “expected value theory” (see also Chapter 2). According to this theory, people take decisions by maximizing the expected value.

However, the St. Petersburg paradox – which is a paradox related to probability and decision theory – made it clear that the expected value theory would not hold in real situations. The paradox is based on a particular (theoretical) lottery game that leads to a random variable with an infinite expected value (i.e., infinite expected payoff) but that nevertheless seems to be worth only a very small amount to ...