Multi-Attribute Approaches to Risk
A person who adopts a risky option undertakes a risk. However the option turns out, the person experiences a risk. A typical person is averse to that risk, and so, if the option’s adoption is rational, the option has attributes that compensate for the risk it involves. A multi-attribute assessment of a risky option examines the option’s attributes, scores the option with respect to them, and checks whether its overall score justifies the option despite the risk it involves.
The multi-attribute approach to risk is an elaboration of Bayesian decision theory. It assumes utility maximization as a standard of rationality and offers a method of assessing an option’s utility. Given uncertainty about an option’s outcome, it assumes that the option’s utility equals the option’s expected utility. To an expected-utility analysis of an option’s utility using the probabilities and utilities of the option’s possible outcomes, it adds an analysis of every possible outcome’s utility. It breaks down a possible outcome’s utility into the possible outcome’s utility with respect to various attributes.
Some versions of the multi-attribute approach to risk treat risk as an attribute, and other versions fold an evaluation of an option’s risk into its evaluation with respect to other attributes. This chapter presents the multi-attribute approach to risk, its most prominent versions, objections to the approach, and ways of addressing the objections.
Although descriptive accounts of people’s decisions may use a multi-attribute analysis of an option’s utility, this chapter examines only evaluative forms of multi-attribute analyses of utility. The evaluative forms use multiple attributes to evaluate the options in a decision problem. The literature also calls these forms of analysis normative or prescriptive.
In a decision problem, the multi-attribute approach to risk provides a transparent evaluation of options and a transparent evaluation of a decision among the options. The approach’s transparency makes it a valuable tool for decisions that require a public justification, such as decisions that trustees make for their clients, in particular, decisions that government regulatory agencies make on behalf of the public. To display the usefulness of the multi-attribute approach to risk, this chapter reviews its application to decisions that a trustee makes for a client.
KeywordsAdditive Representation Risky Option Comprehensive Utility Utility Curve Intrinsic Desire
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