Document Type

Working Paper

Publication Date

6-28-2015

SSRN Discipline

LSN Subject Matter eJournals; Constitutional Law, Jurisprudence & Legal Philosophy eJournals; ERN Subject Matter eJournals; Financial Economics Network; CGN Subject Matter eJournals; Economics Research Network; Legal Scholarship Network; Corporate, Securities & Finance Law eJournals; Banking & Financial Institutions eJournals; Microeconomic Theory eJournals; Law School Research Papers - Legal Studies; FEN Subject Matter eJournals; Corporate Governance Network

Abstract

Our goal in this symposium article is to introduce the general idea of superrisk and to explain its features and sources Risk is a pervasive feature of law and public policy Decisionmaking in these domains often takes place in the absence of certainty and with awareness that errors may be made and predictions may fail Within law "” as within the social and physical sciences medicine economics finance and countless other domains "” a primary focus of practical and scholarly inquiries is the extent to which risks can be measured and managed In each of these domains risk analysis typically employs the basic tools of decision theory probability and utility to measure the likelihood as well as the costs and benefits associated with possible outcomes Risk analysis also often makes use of the familiar but confusing distinction between decisions made in conditions of "risk" roughly the relevant likelihoods and costs are quantifiable and decisions made in conditions of "uncertainty" roughly the possibilities are either unknown or not amenable to quantificationBeginning with the riskuncertainty distinction but altering its terminology we argue that there is a fundamentally important type of risk that has been systematically ignored We call it "superrisk" Superrisk occurs when at the time of decision decisionmakers believe they are in conditions of risk what we call "actuarial decisionmaking" but they do not know whether they are in an actuarial or an uncertain environment Superrisk gives rise to a particular type of inferential problem with significant practical consequences when decisionmakers proceed under the assumption that they are in an actuarial environment but they are in fact in an uncertain one Superrisk has the potential to arise in any decisionmaking domain with uncertain outcomes but it is more prone to arise with decisionmaking in domains such as law public policy economics finance and the social sciences rather than in domains such as the physical sciences medicine and insurance

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