Academic journal article Journal of Risk and Insurance

Rational Risk Policy

Academic journal article Journal of Risk and Insurance

Rational Risk Policy

Article excerpt

Rational Risk Policy, by W. Kip Viscusi, Harvard Law School, Oxford: Clarendon Press

Reviewer: William Feldhaus, Georgia State University

This book is the written version of a series of lectures delivered by the author at the Lund University in Sweden on May 20 and 21, 1996. These lectures were part of the Ame Ryde Memorial Lectures at the university.

The theme for this book is that the irrationality of individual decisions regarding risk is often replicated in government regulation. Concerns about risk in the market may eventually lead to the involvement of government. The role of government should be to advance basic efficiency principles, ensuring that the benefits of regulatory intervention are commensurate with the costs. Unfortunately, government often acts in response to political pressure, including that resulting from erroneous risk assessment. This may lead to the institutionalization of these misconceptions in public policy.

The author begins with a discussion of individual risk perceptions. In assessing risks it is common for individuals to overestimate the small risks and underestimate the large risks. For example, individuals tend to overestimate the likelihood of loss from such perils as botulism, asteroids, and natural disasters. In contrast, they often underestimate the more meaningful risk, such as loss by stroke, heart disease, or cancer. From this observation, the author formulates the "prospective reference theory," in which individuals use these biased reference points when considering uncertain prospects.

One way to overcome these erroneous risk assessments would be to provide individuals with additional risk information. The author provides an informative discussion of hazard warnings and risk information that have been used in the past. Examples include employees' right to know about job-related chemical exposures and the infamous warnings to cigarette smokers. …

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