1. Risk and uncertainty: perceptions and communication
Stavros A. Zenios
University of Cyprus
Senior Fellow Wharton School (USA)
Adjunct Professor Norwegian School of Economics

2. Outline Risk, uncertainty and ambiguity Perceptions of risk
Risk-aware culture
Risk communication

3. References Hopkin, Ch. 10-11 (optional)
Financial Times, April 4, Sweden tries to solve nuclear storage problem. Waste threatens life for at least 100,000 years
Kammen and Hassenzahl, Ch. 10, pp
Zenios, Sec. 2.6–2.8

4. 1. Risk, uncertainty and ambiguity
The message is that there are known knowns.
There are things we know that we know.  There are known unknowns.
That is to say there are things that we now know we don't know.  But there are also unknown unknowns.
There are things we don't know we don't know.  
Donald Rumsfeld 
Is risk a known known or unknown unknown?

5. 1. Risk, uncertainty and ambiguity
Ellsberg two urn game

6. 1. Risk, uncertainty and ambiguity
Risk: quantities susceptible to measurement (measurable)
Uncertainty: unmeasurable quantities Frank Knight, Risk, Uncertainty and Profit, Houghton Mifflin, Boston,
Ignorant of relative likelihoods or frequency distributions
Impossible a priori to estimate relative likelihoods
Unique event
Once-and-for-all decision
“Risk is not uncertain at all”

7. 1. Risk, uncertainty and ambiguity
Ambiguity: a quality depending on the amount, type, reliability and "unanimity" of information, and giving rise to one's degree of "confidence" in an estimate of relative likelihoods. Ellsberg, D., Risk, Ambiguity, and the Savage Axioms, The Quarterly Journal of Economics, 75(4): , ?sici= % %2975%3A4%3C643%3ARAATSA %3E2.0.C0%3B2-E
Ambiguity even with ample quantity of information:
Reliability
Relevance of information
Conflicting opinion
Conflicting evidence

8. 1. Risk, uncertainty and ambiguity
Playing the roulette
Failed components in assembly line
Intensity of earthquakes and height of tsunami waves
Seasonal changes in demand
Effects of Y2K
The results of Research and Development
The performance of a new CEO
The tactics of an unfamiliar opponent

9. 1. Risk, uncertainty and ambiguity
Choice depends on three factors:
relative desirability of the possible pay-offs
relative likelihood of the events affecting them
nature of information concerning the relative likelihood of events
Expected value
Expected utility
Minimize maximum losses
Maximize minimum

10. 1. Risk, uncertainty and ambiguity
Utility functions

11. 1. Risk, uncertainty and ambiguity

12. 1. Risk, uncertainty and ambiguity

13. 1. Risk, uncertainty and ambiguity

14. 1. Risk, uncertainty and ambiguity

15. 1. Risk, uncertainty and ambiguity

16. 2. Perception of risk Fukushima nuclear reactor disaster
Earthquake 9
Tsunami protection 10m, 13m, 5.7m (actual 15m!)
No deaths or cases of radiation sickness from the nuclear accident, but over 100,000 people were evacuated from their homes to ensure this.
Government nervousness delays the return of many.
Official figures show that there have been over 1000 deaths from maintaining the evacuation, in contrast to little risk from radiation if early return had been allowed.
Similar tsunami 1140 years ago
Cleaning UCY campus from asbestos

17. 2. Perception of risk
Data & analytics is the foundation not the core of risk management
“Put risks in perspective” ≭ Social acceptability ≭ Policy
Fischhoff developmental stages of risk management
All we have to do is get the numbers right
All we have to do is tell them the numbers
All we have to do is to explain the numbers
All we have to do is show them they accepted similar risks before
All we have to do is show them that this is a good deal for them
All we have to do is treat them nicely
All we have to do is make them partners
All of the above

18. 2. Perception of risk
Do the numbers tell the same to everyone? Facility with additional annual individual risk premature fatalities 7.2E-7=0, (Industry standard is 1E-6). City of 500,000 === Risk contained to low-income community of 2000 near facility Thirteen similar facilities near community, and 6 in rest of city
Annual risk to average resident from all sources?
Annual risk of premature fatalities to the whole city?
Annual risk to average low-income community resident?
Annual risk to average community resident from 13 facilities?
Annual risk of premature fatalities in community from 13 facilities?
Total fatalities in community over 20 years

19. 2. Perception of risk

20. 3. Risk-aware culture Styles of risk management
Hazard management
Control management
Opportunity management
Willingness to put resources at risk

21. 3. Risk-aware culture Who and How -LILAC Levels -4N Leadership
Involvement
Learning
Accountability (not blaming!)
Communication
Levels -4N
Naïve
Novice
Normalized
Natural

22. 3. Risk-aware culture Natural Normalized Novice Naive Improving
behaviour
Natural
Normalized
Novice
Naive
Competent
Undesirable
Increasing
effort
Embedded
Delibereate

23. 4. Risk communication Publisher facing libel and slander risk
Exxon Valdez oil spill
BP Gulf oil spill

24. 4. Risk communication Internal Training Shared vocabulary
Risk Information Management System
Risk management policies and protocols
Risk data
Insurance coverage, values, risk data, claims, management
Historical experience
Action plans and emergency arrangements
Business continuity plans and responsibilities
Disaster recovery plans and responsibilities
Corporate governance

25. 4. Risk communication External Know thy stakeholder Simplify language
Objective: transparent on opinion vs facts
Honest, accounting for understanding of audience
Dear with uncertainty
Beware putting risks in perspective
Key messages: clear, concise and to the point
No more than 3 massages
Answer questions and be ready to come back

26. Conclusions