Risk attitudes in risk-based design: Considering risk attitude using utility theory in risk-based design

Abstract

2012). Risk attitudes in risk-based design: Considering risk attitude using utility theory in risk-based design. AbstractEngineering risk methods and tools account for and make decisions about risk using an expected-value approach. Psychological research has shown that stakeholders and decision makers hold domain-specific risk attitudes that often vary between individuals and between enterprises. Moreover, certain companies and industries (e.g., the nuclear power industry and aerospace corporations) are very risk-averse whereas other organizations and industrial sectors (e.g., IDEO, located in the innovation and design sector) are risk tolerant and actually thrive by making risky decisions. Engineering risk methods such as failure modes and effects analysis, fault tree analysis, and others are not equipped to help stakeholders make decisions under risk-tolerant or risk-averse decision-making conditions. This article presents a novel method for translating engineering risk data from the expected-value domain into a risk appetite corrected domain using utility functions derived from the psychometric Engineering Domain-Specific Risk-Taking test results under a single-criterion decisionbased design approach. The method is aspirational rather than predictive in nature through the use of a psychometric test rather than lottery methods to generate utility functions. Using this method, decisions can be made based upon risk appetite corrected risk data. We discuss development and application of the method based upon a simplified space mission design in a collaborative design-center environment. The method is shown to change risk-based decisions in certain situations where a risk-averse or risk-tolerant decision maker would likely choose differently than the expected-value approach dictates.

Integrating SWOT analysis into the FMEA methodology to improve corrective action decision making

“…Another limitation of the model which must be considered carefully for practical application relates to the model's ignorance of the risk perceptions of decision makers in various industries in choosing improvement initiatives. According to Bossuyt et al (2012), for risk -averse industries, such as nuclear and aerospace, practitioners tend to choose the least risky improvement strategy. However, the opposite may be true in the web development industries where the consequences of failure may be less severe.…”

A method of identifying and analyzing irrational system behavior in a system of systems

“…Decision theory and utility theory have been used to help understand how people can appear to behave irrationally, [76][77][78][79][80][81] including how neural systems work 82,83 Through the application of utility and decision theory, it is now possible to develop system models that deviate from the expected value theorem and instead match a specific utility function of either an individual or an organization. 84 We contend that (much like humans) while a system may appear to be behaving irrationally to an outside observer, the system's utility function may be different from the observer's expectation. In other words, the system is behaving normally based on its own internal utility function but appears to an external observer to be behaving irrationally.…”

Risk Attitude and Risk Controllability: Their Implications on the Subjective Quantification of Risk in International Construction Projects

“…For this reason, they developed an evolutionary simulation model to investigate that how risk attitudes will have effect on the success of contractors and the market. Moreover, Bossuyt et al [54] explored risk attitudes through utility theory in risk-based design so as to address the important risks via numerically based approach rather than the gut feeling usage, and to explain risk-based decisions.…”