Why environmental and resource economists should care about non-expected utility models

Abstract

Experimental and theoretical analysis has shown that the conventional expected utility (EU) and subjective expected utility (SEU) models, which are linear in probabilities, have serious limitations in certain situations. We argue here that these limitations are often highly relevant to the work that environmental and natural resource economists do. We discuss some of the experimental evidence and alternatives to the SEU. We consider the theory used, the problems studied, and the methods employed by resource economists. Finally, we highlight some recent work that has begun to use some of the alternatives to the EU and SEU frameworks and discuss areas where much future work is needed. #

Model Uncertainty, Ambiguity and the Precautionary Principle: Implications for Biodiversity Management

“…To prevent the irreversible change, which is not clearly demonstrated since the decision maker does not know that the LFP will prevail, a precautionary approach should be taken, which implies that the decision rule should be 1 In a recent article Shaw and Woodward (2008) very clearly present the high relevance of this analytical framework for environmental and resource economics. 2 Given a set of prior probability distributions associated with the multiple priors framework, the LFP is the one that corresponds to the least favorable outcomes.…”

Perceived risks of mountain landslides in Italy: stated choices for subjective risk reductions

“…We are aware that there is a very 89 long literature on eliciting and modeling subjective risks or risk perceptions, and space simply does not 90 allow that here. The reader unfamiliar with this is referred to Shaw and Woodward (2008) For example, in transportation studies, subjects can be asked about actual commuting routes or choices 109 they recently made, as well as newly proposed routes, and formal tests of the difference in responses 110 current study because there is currently no actual data to allow this, and no subject would volunteer to 112 actually experience a risky landslide in some dreadfully constructed experiment; such morbid 113 experiments are of course now banned by human subjects research boards around the world. 114…”

Combining Expected Utility and Weighted Gini-Simpson Index into a Non-Expected Utility Device

“…As Shaw and Woodward [26] say, focusing on the issue of natural resources management, the problem in classical utility theory is that the optimization of the models may have to accommodate preferences that are nonlinear in the probabilities. There are many approaches with this perspective, known at least since Edwards in 1955 and1962 [27] discussed in parallel the theory of Kurt Lewin utility and the theory of subjective probability of Francis Irwin, introducing the concept of decision weights instead of probabilities; the Lewin utility theory was referred to as anchored in the concept that an outcome which has a low probability will, by virtue of its rarity, have a higher utility value than the same outcome would have if it had a high probability.…”