Thinking and Deciding

Chapter 20
Risk
Decisions under uncertainty always involve risk, in some technical sense of the term
“risk.” People use the term differently in everyday speech, though. The term usually
refers to some chance of something bad happening. People take risks when they
drive recklessly. Nations take risks when they go to war. Investors and entrepreneurs
risk losing time and money.
Governments pass laws and make regulations in order to reduce risks. Most
governments have standards for food and drugs. Some have standards for air and
water, to reduce the risk of disease. Products are regulated by law. One form of law
is the law of torts, which allows a person injured by a product to sue the manufacturer.
The possibility of such suits leads manufacturers to worry about the safety of their
products.
Many of these laws and regulations — or their absence — are controversial. Real
estate developers often feel that they are subject to too many bureaucratic regulations,
yet building codes may be necessary to prevent damage to life and property. Environmentalists
want more regulation of big cars and gasoline-powered tools that pollute
the air, putting people’s health at risk, yet these regulations raises prices and restrict
individual choice. Democratic governments respond to the concerns of their citizens.
We can understand much about these controversies by looking at how people
in general think about risks.
This chapter will focus on the issues around these controversies. It will review
the normative theory and then the empirical findings concerning intuitions about
risk. These intuitions lead people to favor systematic departures from the normative
theory. These departures express themselves in government policy. These departures
lead to a situation in which we could save money, health, and lives by bringing public
policy closer to the normative theory. Such movement will have to find support in
the judgments of individuals, however.
The present chapter does not discuss the determinants of personal risk taking.
People take all sorts of risks that may, or may not, be irrational. They smoke, eat
unhealthy food, exercise too little, and ignore good medical advice. Many of the
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