Decisions on risk treatment

Overview

Flowchart for risk treatment: reduce, transfer or accept Risk treatment is the process of selecting and implementing measures to reduce risk. Methods include risk avoidance, risk modification (reducing the probability of the unwanted event or mitigating its consequences) and risk transfer (hedging and insurance). An organization’s decisions on which levels of risk are acceptable, and how to allocate investments between risk reduction and risk transfer, depend on the organization’s risk attitude.

Decision-making concerning risk and safety management is often affected by a tension between two partially compatible bodies of knowledge:

the engineering view of objective risk assessment, decision trees and rational decision-making
the social sciences view of risk as a socially constructed phenomenon, of risk-related decisions as the result of a satisficing (“good enough”) process in which political considerations may weigh more than risk metrics

This submodule, using concepts from economics and psychology, covers topics including

risk attitudes, risk perception and their impact on decision-making
utility and risk aversion
insurance, liability law and regulation as social methods of risk control

This submodule is a part of the risk management module.

Learning objectives

Upon completion of this submodule, you should be able to:

Understand risk attitude, risk appetite and perceptions of risk
Understand different forms of risk transfer, including hedging and insurance

Course material

	Risk treatment: introduction Lecture slides (PDF)

	Economic viewpoint on risk transfer Lecture slides (PDF)
	Handout on risk treatment Handout (PDF)
	Python notebook on the Saint Petersburg paradox View Python notebook online Download Python notebook Run notebook in MyBinder Run notebook in Google Colab