Sept 11, 2006 Risk and Public Policy

Risk, Uncertainty

BUSH 689.601

September 4, 2006

Sept 11, 2006 Risk and Public Policy

Dose

Res

pons

e

A B

Res

pons

e

Dose- +

Res

pons

e

DoseA B

AB

C

Variation Uncertainty

Real inter-individual difference Lack of statistical or scientific knowledge concerning some risk-related characteristics

Variability and Knowing Cause and Effect

Sept 11, 2006 Risk and Public Policy

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

Sept 11, 2006 Risk and Public Policy

Sources of Uncertainty

• Statistical variation

• Systematic error and subjective judgment

• Linguistic imprecision

• Variability

• Inherent randomness

• Disagreement

• Approximation

Sept 11, 2006 Risk and Public Policy

Evolution of Uncertainty Over Time

Sept 11, 2006 Risk and Public Policy

Decision Analysis

Event 1

Event 2a

Event 2b

Choice a

Choice b

Outcome Payoff

p1a

p1b

p2a1

p2a2

p2b1

p2b2

v1

v2

v3

v4

Sept 11, 2006 Risk and Public Policy

SuspectCaptured

.65 Terrorist

.35 Innocent

ProceduralChoice

Renditionand torture

GenevaConvention

Renditionand torture

GenevaConvention

ProducesConfession

0.9

0.1

0.6

0.4

0.5

0.5

0.0

1.0

AnticipatedIntelligence

Value

10

0

7

0

-5

0

-5

0

Decisions about Interrogation of a Terrorist Suspect

Sept 11, 2006 Risk and Public Policy

Valuing Prospective Losses

Utility

Losses SQ Gains

WTA WTP

Sept 11, 2006 Risk and Public Policy

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

Sept 11, 2006 Risk and Public Policy

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

Sept 11, 2006 Risk and Public Policy

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.

Sept 11, 2006 Risk and Public Policy

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.

Sept 11, 2006 Risk and Public Policy

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?

Sept 11, 2006 Risk and Public Policy

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

WTP x e=+11 PyesPWTPt Gtw()( ) ()=>=−1

Sept 11, 2006 Risk and Public Policy

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), preliminary average WTP per household is $432 per year

• Nationally: about $48.9 billion annually

Sept 11, 2006 Risk and Public Policy

National Energy R&D Fund

-400

-200

0

200

400

600

800

1,000

1,200

70% 75% 80% 85% 90%

HouseholdWTP in$ / Year

Willingness to Pay by Certainty

Certainty

Standard is 80% Certain

Sept 11, 2006 Risk and Public Policy

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?