A STUDY ON RISK MANAGEMENT BY AN ECONOMIC CONCEPTUAL MODEL

Abstract

ABSTRACT; This paper examines the role of three measures of reducing risks, i. e., probability reduction, damage reduction, and insurance. Probability reduction alone is usually emphasized in various risk management projects, and still it is the most importantmeasures among others. However, damage reduction and insurance might also be the useful measures to reduce the burden of risks, especially when the degree of risk aversion is high in the preferences of people. Thus, these two alternative measures had better be considered as well as probability reduction in order to explore the optimal combination. Aside from this aspect, risk-cost-benefit analysis usually assumes risk neutrality in the sense that the expected value of the benefit alone is compared with its cost. However, when people are risk averse, the analysis will underevaluate the benefit of the risk management project.