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Title:Expected Utility theory and the tyranny of catastrophic risks PDF Logo
Authors:Buchholz, Wolfgang
Schymura, Michael
Issue Date:2010
Series/Report no.:ZEW Discussion Papers 10-059
Abstract:Expected Utility theory is not only applied to individual choices but also to ethical decisions, e.g. in cost-benefit analysis of climate change policy measures that affect future generations. In this context the crucial question arises whether EU theory is able to deal with 'catastrophic risks', i.e. risks of high, but very unlikely losses, in an ethically appealing way. In this paper we show that this is not the case. Rather, if in the framework of EU theory a plausible level of risk aversion is assumed, a 'tyranny of catastrophic risk' (TCR) emerges, i.e. project evaluation may be dominated by the catastrophic event even if its probability is negligibly small. With low degrees of risk aversion, however the catastrophic risk eventually has no impact at all when its probability goes to zero which is ethically not acceptable as well.
Subjects:utilitarianism
Expected Utility theory
catastrophic risks
JEL:Q54
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des ZEW
ZEW Discussion Papers

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