Risk, Uncertainty

1. Risk, Uncertainty BUSH 689.601 September 4, 2006 Risk and Public Policy

2. 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

3. 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

4. Sources of Uncertainty • Statistical variation • Systematic error and subjective judgment • Linguistic imprecision • Variability • Inherent randomness • Disagreement • Approximation Risk and Public Policy

5. Evolution of Uncertainty Over Time Risk and Public Policy

6. 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

7. 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

8. Utility WTP WTA Losses SQ Gains Valuing Prospective Losses Risk and Public Policy

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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