RISK

RISK It is never possible to predict a physical occurrence with unlimited precision

Max Planck (1858-1947)

CHAPTER 5. RISK

Probabilistic Concept

Risk Analysis

Questions of design, reliability, and risk are most adequately analyzed as random processes using principles of probability theory. The results from these methods of analysis can be introduced into the decisionmaking process.

In this section, we discuss some controversies associated with the use of models and how science and politics are merged to perform risk analyses and to regulate technology..

RiskBenefitCost Analysis Risk-benefit-cost analysis is

conducted using the same principles as previously presented for capital investment analysis

The laws of probability are: 1. 0 () 1 where S is any event. 2. = 0 and = 1 , where represents the null event and Z represents the entire sample size. 3. If the complementary event if S in Z is designated as S, then = 1 () According to the laws of probability, the probability of an event must always lie between zero and one, so that 0 1 and 0 1 1 must hold. If an event is certain, a probability of one is assigned, that is, = 1. Then it follows that its complement is an impossible event (probability equal to zero).

Expectation
Let the random variable Y for the sample space Z be defined as:
0 = 1
And

= 1 = = 0 = 1
Or as the probability model,

= = = 1
The expected value of Y is defined to be

= 0, 1

()

Risk
Risk is the expected loss or damage associated with the occurrence of a

harmful event, or = () . The literature also defines risk as the, probability that humans and other living species are exposed to a hazard, or . Unfortunately, using the same term to describe an expected value and probability can lead to ambiguity. In this text, risk R is defined as an expected monetary cost:.

= =
where

= the monetary consequence from a given state of nature or technology

= risk probability

The value of live

The effect of risk can be studied using the notion of expected value, = () and = . This analysis leads to the question, "What is the value of life?" or h. Three basic calculation methods can be used to answer this question : The human capital approach, also called the "foregone earnings" approach, values a life based on the premature death of the individual. The willingness to pay approach uses questionnaires to ask individuals how much they would pay to avoid the risk of death. The cost-effectiveness approach is another alternative that indirectly estimates the value of life

By law, proposals for constructing large-scale projects are subject to public review. Thus, the decisions on whether or not to construct are often based on and strongly influenced by public opinion, political lobbying, journalistic reporting and interpretation, and the strength of arguments and conviction of advocates and protestors. The selection process in practical application may sometimes appear to be disorderly and imprecise. Mathematical modeling plays an important role in developing our understanding of a system and aids in the decisionmaking process. A model has limitations, and if its application is overextended, the results may be questionable. Clearly, a final decision incorporates more information than just a technological evaluation.

Alternatives with dissimilar attributes is a very appealing approach to reducing waste Source reduction
volume. Consider two very different strategies for implementing this plan. The first alternative involves capital investment to introduce a new manufacturing process. The second alternative is to educate the public in the practice of purchasing products paclwged in returnable containers. The question is which plan should be recommended. In the first case, the performance of the manufacturing process can be modeled using accepted engineering and mathematical modeling principles. In the second case, the response to the initiative can be measured by a survey. In both cases, the amount of material to be thrown away as waste is estimated and compared and preference is given to the alternative with the least residual.

Risk-benefit-cost analysis is conducted using the same principles as previously presented for capital investment analysis. Analyzed as a net present worth problem, the measure of effectiveness is

where

=
=0

() (1 + )

= () for year t

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