Economic Tools for Risk Reduction

Abstract

Risks are inherent in human activity. Society has devised a series of tools (or institutions or modes of behavior) to cope with risk; some of the coping takes the form of risk reduction behavior and some takes the form of rationalizing the acceptance of risk. Much of the nonrational behavior can be seen as suboptimizing, given the difficulty and expense of obtaining data, the difficulty and expense of analysis, and the cost of changing behavior. Three contradictions exemplify the difficulty of regulating risk: we are safer than ever before but more worried about risk, consumerists have achieved virtually all of their objectives but there is general dissatisfaction with risk regulation, and regulations never seem to achieve their objective. These contradictions show the need for explicit estimation of risks, costs, and benefits and recognition of the difficulty of changing individual’s behavior. Only by recognizing the difficulties of regulating risks and developing thoughtful approaches can we hope to achieve progress.