Decision-making for civil infrastructure exposed to low-probability, high-consequence hazards: The role of risk-aversion

The assessment of risk to civil infrastructure has two components: probability of a potentially damaging event and consequence of damage, measured in terms of financial or human losses. Decision models that have been developed and implemented during the past three decades take into account the probabilistic aspect rationally, but address decision-maker attitudes toward risk only to a limited degree. The application of such models to decisions involving low-probability, high-consequence events affecting civil infrastructure requires a fundamental understanding of risk acceptance attitudes and how they affect individual and group choices. The phenomenon of risk aversion may be a significant factor in decisions for civil infrastructure exposed to low-probability events with high consequences, such as earthquakes, hurricanes or floods. This paper utilizes cumulative prospect theory to investigate characteristics of risk-aversion that can be inferred from risk pricing techniques in the insurance industry and explores the role of risk-aversion in assurance of structural safety.