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Decisions on risk treatment


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 mybinder

Run notebook in Google Colab

Other resources

We recommend the following sources of further information on this topic:

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