Sustainability and its relation to efficiency under uncertainty

Krysiak, Frank C.

doi:10.1007/s00199-008-0397-x

Cited by 24 publications

(8 citation statements)

References 18 publications

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“…by introducing certain threshold levels (see e.g. Baumgärtner et al, 2008 [3]), or to leave EU theory instead applying some variant of non-expected utility theory 4 or Kriysiak (2009 [16]). The intention of most of these approaches, however, is to give catastrophic risks more attention instead of less such that the TCR might even be aggravated.…”

Section: Resultsmentioning

confidence: 99%

Expected Utility Theory and the Tyranny of Catastrophic Risks

Buchholz

Schymura

2010

SSRN Journal

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10059.pdf Executive SummaryExpected Utility (EU) theory is not only applied to individual choices but also to ethical decisions, e.g. in cost-benefit analysis of climate change policy measures that affect future generations. In this context the crucial question arises whether EU theory is able to deal with "catastrophic risks", i.e. risks of high, but very unlikely losses, in an ethically appealing way. In this paper we show that this is not the case. Rather, if in the framework of EU theory a plausible level of risk aversion is assumed, a "tyranny of catastrophic risk" (TCR) emerges, i.e. project evaluation may be dominated by the catastrophic event even if its probability is negligibly small. With low degrees of risk aversion, however the catastrophic risk eventually has no impact at all when its probability goes to zero which is ethically not acceptable as well. Our work contributes to the literature about the paradoxes of EU theory, like e.g. the Allais paradox orMartin Weitzmans "dismal theorem". In this spirit we will consider the specific case of catastrophic risks where extremely high losses occur with a very low probability like for example extreme forms of climate change. After introducing the problem we give some heuristic motivation and show, that it can be an ethical imperative that the willingness to pay for avoiding catastrophic risks should be limited. Then we formalize the so-called "Tyranny of Catastrophic Risks"(TCR) and show that it crucially depends on the type of the underlying utility function whether bad but very unlikely outcomes may dominate the results.Furthermore we conclude that one would have to assume an implausibly low degree of risk aversion to exclude TCR. Finally we disucss shortly alternatives to EU theory, but the intention of most of these approaches is to give catastrophic risks more attention instead of less such that the TCR might even be aggravated. Expected Utility Theory and the Tyranny of Catastrophic RisksWolfgang Buchholz * and Michael Schymura † August 25, 2010Abstract Expected Utility theory is not only applied to individual choices but also to ethical decisions, e.g. in cost-benefit analysis of climate change policy measures that affect future generations. In this context the crucial question arises whether EU theory is able to deal with "catastrophic risks", i.e. risks of high, but very unlikely losses, in an ethically appe...

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Section: Resultsmentioning

confidence: 99%

Expected Utility Theory and the Tyranny of Catastrophic Risks

Buchholz

Schymura

2010

SSRN Journal

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“…). Daly 1992; Woodward and Bishop 1995;Padilla 2002; Krysiak 2009). Neoclassical theory abstracts from the institutional context in which policy decisions and allocation decisions are taken.…”

Section: Economic Advice For Bioenergy Policy: Betweenmentioning

confidence: 99%

Concepts and Instruments for a Rational Bioenergy Policy

Purkus¹

2016

Lecture Notes in Energy

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study of energy: from science and engineering to the analysis of energy policy. The series' scope includes but is not limited to, renewable and green energy, nuclear, fossil fuels and carbon capture, energy systems, energy storage and harvesting, batteries and fuel cells, power systems, energy efficiency, energy in buildings, energy policy, as well as energy-related topics in economics, management and transportation.Books published in LNE are original and timely and bridge between advanced textbooks and the forefront of research. Readers of LNE include postgraduate students and non-specialist researchers wishing to gain an accessible introduction to a field of research as well as professionals and researchers with a need for an up-to-date reference book on a well-defined topic.The series publishes single-and multi-authored volumes as well as advanced textbooks.**Indexed in Scopus and EI Compendex**The Springer Energy board welcomes your book proposal. Please get in touch with the series via Anthony Doyle, Senior Editor, Springer (anthony.doyle@springer.com) More information about this series at

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“…Krysiak's valuable contribution evaluated consequences of actions (or projects) in the context of sustainability and characterized the trade-off between sustainability and efficiency (Krysiak 2009). He provided an interesting choice rule for a special case that has a connection to portfolio theory.…”

Section: Sustainability and Servicizingmentioning

confidence: 99%

Using portfolio theory to improve resource efficiency of invested capital

Byers

Groth

Sakao

2015

Journal of Cleaner Production

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The diligent use of capital of all forms contributes to sustainability. In fact, capital employment is a common factor in sustainability research and in the practice of sustainability management. For example, capital usage is included in research in environmental sustainability in the context of sustainable consumption. Product/Service Systems (PSS), which includes product sharing as one concrete form, has been addressed in research on that context. However, virtually no literature provides concrete, theory-based methods for quantifying the effects of sharing products. The goal of this paper is to describe the potential contribution of portfolio theory in order to quantify the effects and optimize the employment of capital in a theoretical and quantitative manner in the context of sustainability. Practices tied to the prescriptions of portfolio theory can contribute to environmental sustainability. The core perspective can be summarized as follows: the pooled, portfolio approach to asset management yields a reduction in assets employed and used relative to the volume of demanded resources used for need fulfillment. To reach this goal, the paper first provides a brief literature review from the "finance side" of literature. Then, the "engineering side" literature offers a few examples of others who have applied the prescriptions of portfolio theory to "engineering" application. After that, it provides an overview of the core issues and implications of portfolio theory, and develops some ideas to support application of portfolio theory. The provided insights illustrate how portfolio principles applied outside the arena of investments can yield benefits, including the fulfillment of needs with the least resource used -a core principle in sustainability. In particular, the "pooling" of assets/services to meet uncertain demands from different users of an asset/service pool may yield benefit from diversification effects. Furthermore, the paper offers additional avenues for future research. It describes how this special application of portfolio theory outside the realm of finance can yield benefits that positively affect the creation of value and resource use in an economy at large.

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Sustainability and its relation to efficiency under uncertainty

Cited by 24 publications

References 18 publications

Expected Utility Theory and the Tyranny of Catastrophic Risks

Expected Utility Theory and the Tyranny of Catastrophic Risks

Concepts and Instruments for a Rational Bioenergy Policy

Using portfolio theory to improve resource efficiency of invested capital

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