This document summarizes a seminar on risk and behavior from a psychological and behavioral economics perspective. It discusses definitions of risk, models for predicting individual behavior, and how people perceive probabilities and value losses and gains differently than expected. Prospect theory is introduced as challenges to the rational actor model. Utility functions are distorted by emotions like fear and hunger in extreme situations. accurately modeling human behavior, decision-making, and risk perception is difficult due to incomplete information, biases, and limitations in data collection for rare events. More research is still needed to better understand behavior in situations involving risk.

1. Risk Studies I
Risk & Behavior, in the light of psychology
and sometimes, with behavioral economics
21st June 2015, TRIP laboratory seminar
K. Matsui
1. Risk & Behavior
2. Risk & Finance
3. Risk & Planning
4. Special lecture by Associate professor Murakami

2. What is RISK?
• Risk = uncertainty + damage
• Risk can be defined with <𝑠𝑖, 𝑝𝑖, 𝑥𝑖>
where 𝑠𝑖 is a scenario identification or description;
𝑝𝑖 is the probability of that scenario;
𝑥𝑖 is the consequence or evaluation of that scenario, ie., a measure of the damage.
by Kaplan & Garrick(1981)
• Risk = probability of the damage × amount of damage
by the Society for risk analysis: Japan-section(2000)
• ‘the effect of uncertainty on objectives’
by AS/NZS ISO 31000:2009
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3. “What we do on risks?” “DO MANAGE.”
1. Identify Risks
2. Analyze Risks
• Determine the likelihood
• Determine the consequences
3. Evaluate Risks
• Accept the risk or not?
4. Treat Risks
• Identify & evaluate options
• Implement the plan
by AS/NZS ISO 31000:2009
Risk control: Risk avoidance, loss control… by policies, engineering…
Risk retention
Risk transfer : by finance
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communicate & consult
monitor & review
requires prediction of
individual behavior
• reduced-form estimation
• structural estimation

4. Prediction of behavior
As a general theory of behavioral modeling:
• Utility function of behavior alternative j, for individual i
𝑈𝑖,𝑗 =
𝑗
𝛽𝑖,𝑗 × 𝑥𝑖,𝑗 + 𝜀𝑖,𝑗
𝛽𝑖,𝑗 is a parameter or weight on a variable,
𝑥𝑖,𝑗 is a variable,
𝜀𝑖,𝑗 is an error term
• Probability of i’s choosing alternative j
𝑃𝑖,𝑗 = 𝑒 𝑉𝑖,𝑗
𝑚 𝑒 𝑉 𝑖,𝑚
QUESTION: deterministic term 𝑉𝑖,𝑗 is really deterministic?
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𝑉𝑖,𝑗: deterministic term
can contain expected risk (uncertainty & damage)
can describe preference

5. Perception of probability 1/2:
Risk perception
• Decision with incomplete information, under uncertainty.
• Utility function is not linear against numerical losses and gains.
• Human being cannot percept the objective likelihood of things.
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Figure: Prospect theory
from Kahneman and Tversky(1979) Figure: Hypothetical weighting function
from Kahneman and Tversky(1979)

6. Perception of probability 2/2:
Estimated frequency vs. Actual frequency 6
Figure: Perception of the frequency of crimes, by students
from Nakayachi(2008)
Figure: Subjective vs. objective frequencies of risk
from Johnson and Tversky(1983)

7. Utility function in the face of risk:
Rationality on the verge of hazard
• “research on fire injuries and deaths shows that over two-thirds of
the injured and over half of the dead in building fires could have
evacuated, but instead were performing activities that delayed
their safety”
Kuligowski(2013)
• “People often act against their self-interest in full knowledge that
they are doing so” by influence of visceral influences.
• “contemporary decision theorists typically define irrationality as a
failure to adhere to certain axioms of choice such as transitivity or
independence”
Loewenstein(1996)
:It seems that the parameters in the utility function or rationality
of homo-economics are distorted at the extreme sides.
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hunger
thirsty
fear…

8. REFERENCES
Johnson, Eric J., and Amos Tversky. "Affect, generalization, and the perception of risk." Journal of
personality and social psychology 45.1 (1983): 20.
Kahneman, Daniel, and Amos Tversky. "Prospect theory: An analysis of decision under
risk." Econometrica: Journal of the Econometric Society (1979): 263-291.
Kaplan, Stanley, and B. John Garrick. "On the quantitative definition of risk."Risk analysis 1.1
(1981): 11-27.
Kuligowski, Erica. "Predicting human behavior during fires." Fire Technology, 49.1 (2013): 101-120.
Loewenstein, George. "Out of control: Visceral influences on behavior."Organizational behavior
and human decision processes 65.3 (1996): 272-292.
※ Slovic, Paul. "Perception of risk." Science 236.4799 (1987): 280-285.
Standards New Zealand, AS/NZS ISO 31000:2009
Wogalter, Michael S., Douglas J. Brems, and Elaine G. Martin. "Risk perception of common
consumer products: Judgments of accident frequency and precautionary intent." Journal of
Safety Research 24.2 (1993): 97-106.
中谷内一也, and 島田貴仁. "犯罪リスク認知に関する一般人-専門家間比較: 学生と警察官の
犯罪発生頻度評価." 社会心理学研究 24.1 (2008): 34-44.
日本リスク研究学会編, 『リスク学事典』, TBSブリタニカ(2000).
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9. Conclusion and other things
Behavioral modeling in the risks is DIFFICULT
• with incomplete variables in the utility functions
• with skew utility function
• in fact, human being also has biases, emotional heuristics and
everything
• in addition, collecting data in rare situation is difficult
• a lot of works to do!
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Normalcy bias
Cooperation bias…