What are we Talking about when we Talk about "Risk"? A Critical Survey of Risk and Risk Preference Theories

Schaefer, R.E. (1978). What are we Talking about when we Talk about "Risk"? A Critical Survey of Risk and Risk Preference Theories. IIASA Research Memorandum. IIASA, Laxenburg, Austria: RM-78-069

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Abstract

The notion of "risk" plays an important role in decisions about modern technologies. We have to learn the discomforting lesson that modern technologies do not only provide benefits, but also "risks", potential loss of monetary values, of environmental quality, of health, or even life. But what exactly is meant by the term "risk"? The present paper considers more formal aspects of "risk". The concept of risk in mathematical statistics and expected utility theory is discussed in some detail. The major part of the paper describes the existing formal axiomatic (measurement-theoretic) theories of risk and risk preference.

Risk refers to the perception of the riskiness of an option (risk estimation), whereas risk preference refers to decision makers' preferences over a set of risky options. Some people are risk seekers, they like gambling, or mountain climbing etc., others prefer to be on the safe side. These theories are discussed in their relation to each other and to expected utility theory. The position is formulated that expected utility theory does not deal with risk in an adequate and psychologically meaningful way. Some results of empirical tests of the various theories are also presented.

The paper closes with a more general discussion of aspects of risk concerning technological and social decisions. It may very well be the case that aspects of risk have to be considered that do not enter in the formal theories as they are formulated at present.

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