Theory versus Practice in Risk Analysis: An Empirical Study

THE THEORY UNDER EXAMINATION HERE IS THE EXISTENCE OF A BASIC CONFLICT BETWEEN UTILITY THEORY AND ACTUAL RISK TOLERANCE DECISION PROCESSES. EXISTING UTILITY THEORY FAILS TO SYNTHESIZE ADEQUATELY THE DECISION PROCESS - AND THIS CONFLICT EXPLAINS THE LACK OF PRACTITIONER INTEREST IN THE TECHNIQUE. THE STUDY, FORMULAE, AND BASIC STRATEGIES OF THE MODEL ARE DESCRIBED IN DETAIL. IT IS CONCLUDED THAT SUBSTANTIAL CONFLICT EXISTS BETWEEN DECISION PROCESSES USED BY ACTUAL DECISION-MAKERS AND EXISTING UTILITY THEORY. THE CONFLICT CENTERS AROUND THE INABILITY OF CLASSICAL UTILITY THEORY TO DEAL EFFECTIVELY WITH SITUATIONS WHERE CONTINGENT OUTCOMES FOR A PROJECT ARE LOWER THAN SOME CRITICAL AMOUNT. CONTRIBUTING FACTORS IN THE APPARENT CONFLICT MAY BE INTERNAL INCONSISTENCY AND AN AVERSION TO RISK AT THE TIME OF ACTUAL CHOICE BY DECISION- MAKERS.