Foundations of Risk Analysis : A Knowledge and Decision-Oriented Perspective

by Aven, Terje

• ISBN13: 9780471495482
• ISBN10: 0471495484
• Format: Hardcover
• Copyright: 2003-11-07
• Publisher: WILEY

Summary

Everyday we face decisions that carry an element of risk and uncertainty. The ability to analyse, communicate and control the level of risk entailed by these decisions remains one of the most pressing challenges to the analyst, scientist and manager. This book presents the foundational issues in risk analysis - expressing risk, understanding what risk means, building risk models, addressing uncertainty, and applying probability models to real problems. The principal aim of the book is to give the reader the knowledge and basic thinking they require to approach risk and uncertainty to support decision making. * Presents a statistical framework for dealing with risk and uncertainty. * Includes detailed coverage of building and applying risk models and methods. * Offers new perspectives on risk, risk assessment and the use of parametric probability models. * Highlights a number of applications from business and industry. * Adopts a conceptual approach based on elementary probability calculus and statistical theory. Foundations of Risk Analysis provides a framework for understanding, conducting and using risk analysis suitable for advanced undergraduates, graduates, analysts and researchers from statistics, engineering, finance, medicine and the physical sciences, as well as for managers facing decision making problems involving risk and uncertainty.

Table of Contents

Preface	ix
1 Introduction	1	(6)
1.1 The Importance of Risk and Uncertainty Assessments	1	(3)
1.2 The Need to Develop a Proper Risk Analysis Framework	4	(2)
Bibliographic Notes	6	(1)
2 Common Thinking about Risk and Risk Analysis	7	(34)
2.1 Accident Risk	7	(21)
2.1.1 Accident Statistics	7	(4)
2.1.2 Risk Analysis	11	(13)
2.1.3 Reliability Analysis	24	(4)
2.2 Economic Risk	28	(8)
2.2.1 General Definitions of Economic Risk in Business and Project Management	28	(2)
2.2.2 A Cost Risk Analysis	30	(1)
2.2.3 Finance and Portfolio Theory	31	(3)
2.2.4 Treatment of Risk in Project Discounted Cash Flow Analysis	34	(2)
2.3 Discussion and Conclusions	36	(7)
2.3.1 The Classical Approach	36	(1)
2.3.2 The Bayesian Paradigm	37	(2)
2.3.3 Economic Risk and Rational Decision-Making	39	(1)
2.3.4 Other Perspectives and Applications	40	(2)
2.3.5 Conclusions	42	(1)
Bibliographic Notes	43
3 How to Think about Risk and Risk Analysis	41	(22)
3.1 Basic Ideas and Principles	47	(5)
3.1.1 Background Information	50	(1)
3.1.2 Models and Simplifications in Probability Considerations	51	(1)
3.1.3 Observable Quantities	51	(1)
3.2 Economic Risk	52	(8)
3.2.1 A Simple Cost Risk Example	52	(3)
3.2.2 Production Risk	55	(2)
3.2.3 Business and Project Management	57	(1)
3.2.4 Investing Money in a Stock Market	58	(1)
3.2.5 Discounted Cash Flow Analysis	59	(1)
3.3 Accident Risk	60	(2)
Bibliographic Notes	62	(1)
4 How to Assess Uncertainties and Specify Probabilities	63	(32)
4.1 What Is a Good Probability Assignment?	64	(4)
4.1.1 Criteria for Evaluating Probabilities	64	(2)
4.1.2 Heuristics and Biases	66	(1)
4.1.3 Evaluation of the Assessors	67	(1)
4.1.4 Standardization and Consensus	68	(1)
4.2 Modelling	68	(3)
4.2.1 Examples of Models	69	(1)
4.2.2 Discussion	70	(1)
4.3 Assessing Uncertainty of Y	71	(12)
4.3.1 Assignments Based on Classical Statistical Methods	72	(1)
4.3.2 Analyst Judgements Using All Sources of Information	73	(1)
4.3.3 Formal Expert Elicitation	74	(1)
4.3.4 Bayesian Analysis	75	(8)
4.4 Uncertainty Assessments of a Vector X	83	(9)
4.4.1 Cost Risk	83	(2)
4.4.2 Production Risk	85	(1)
4.4.3 Reliability Analysis	86	(4)
4.5 Discussion and Conclusions	90	(2)
Bibliographic Notes	92	(3)
5 How to Use Risk Analysis to Support Decision-Making	95	(50)
5.1 What Is a Good Decision?	96	(10)
5.1.1 Features of a Decision-Making Model	97	(1)
5.1.2 Decision-Support Tools	98	(5)
5.1.3 Discussion	103	(3)
5.2 Some Examples	106	(21)
5.2.1 Accident Risk	106	(2)
5.2.2 Scrap in Place or Complete Removal of Plant	108	(5)
5.2.3 Production System	113	(1)
5.2.4 Reliability Target	114	(2)
5.2.5 Health Risk	116	(3)
5.2.6 Warranties	119	(1)
5.2.7 Offshore Development Project	120	(2)
5.2.8 Risk Assessment: National Sector	122	(2)
5.2.9 Multi-Attribute Utility Example	124	(3)
5.3 Risk Problem Classification Schemes	127	(15)
5.3.1 A Scheme Based on Potential Consequences and Uncertainties	127	(4)
5.3.2 A Scheme Based on Closeness to Hazard and Level of Authority	131	(11)
Bibliographic Notes	142	(3)
6 Summary and Conclusions	145	(4)
Appendix A Basic Theory of Probability and Statistics	149	(26)
A.1 Probability Theory	149	(17)
A.1.1 Types of Probabilities	149	(2)
A.1.2 Probability Rules	151	(4)
A.1.3 Random Quantities (Random Variables)	155	(4)
A.1.4 Some Common Discrete Probability Distributions (Models)	159	(1)
A.1.5 Some Common Continuous Distributions (Models)	160	(4)
A.1.6 Some Remarks on Probability Models and Their Parameters	164	(1)
A.1.7 Random Processes	165	(1)
A.2 Classical Statistical Inference	166	(5)
A.2.1 Non-Parametric Estimation	166	(1)
A.2.2 Estimation of Distribution Parameters	167	(2)
A.2.3 Testing Hypotheses	169	(1)
A.2.4 Regression	170	(1)
A.3 Bayesian Inference	171	(3)
A.3.1 Statistical (Bayesian) Decision Analysis	173	(1)
Bibliographic Notes	174	(1)
Appendix B Terminology	175	(4)
Bibliography	179	(8)
Index	187