Theory and Decision 70 (2):195-213 (2011)

Till Grüne-Yanoff
Royal Institute of Technology, Stockholm
We construct a model of rational choice under risk with biased risk judgement. On its basis, we argue that sometimes, a regulator aiming at maximising social welfare should affect the environment in such a way that it becomes ‘less safe’ in common perception. More specifically, we introduce a bias into each agent’s choice of optimal risk levels: consequently, in certain environments, agents choose a behaviour that realises higher risks than intended. Individuals incur a welfare loss through this bias. We show that by deteriorating the environment, the regulator can motivate individuals to choose behaviour that is less biased, and hence realises risk levels closer to what individuals intended. We formally investigate the conditions under which such a Beneficial Safety Decrease—i.e. a deteriorating intervention that has a positive welfare effect—exists. Finally, we discuss three applications of our model
Keywords Philosophy of risk  Rational choice  Risk offsetting behaviour  Judgement bias  Safety regulation  Risk policy  Paternalism
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Reprint years 2011
DOI 10.1007/s11238-010-9235-2
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