Understanding Risk, Incentives, and Decision Making

What is a common psychological effect on people who experience a major natural disaster regarding future risks?

They are likely to overestimate the future risk of similar occurrences.

What does a lower cost of capital suggest about an alternative's safety?

It suggests that the alternative is safer.

How do organizations incorporate opportunity cost of capital into their calculations?

They utilize it through discounting.

How do governments typically approach risk in relation to potential rewards?

Governments are most likely to take additional risk without regard to the amount of reward associated with it.

At what levels can incentives exist?

Incentives can exist at the individual, organizational, or societal levels.

What effect do political incentives have on the discount rate?

Political incentives often increase the discount rate.

What is the difference between expected utility and expected value?

Expected utility is used for individuals, while expected value is used for organizations.

What skill is essential for effective critical decision making?

Understanding the trade-off between risk and reward.

What does proper decision making imply for entities willing to accept additional risk?

They should be compensated for accepting additional risk.

What is location bias in the context of developing models?

Location bias is not considered a main bias encountered when developing models.

What are some types of biases encountered in decision making?

Age, cultural, experience, gender, and media biases.

How can bias be described in relation to low probability/high consequence events?

Bias can be described as a subjective view where people overestimate the likelihood of such events, known as experience bias.

How do organizations use expected value in financial calculations?

Organizations use expected value as an estimate of future cash flows generated by an investment, which are then discounted back to present value.

What happens to discount rates when long-term cash flows are perceived as less valuable?

Discount rates become higher.

What is the focus of economics in relation to incentives?

Economics is the study of the incentive system.

What is the purpose of organizational level incentives?

They are designed to motivate employees within a company.

What are government level incentives aimed at?

They are typically aimed at influencing the behavior of citizens or businesses for broader societal goals.

What is the general role of incentives?

Incentives motivate people to perform actions.

What are the types of incentives?

Financial, moral, natural, coercive, and personal vs. social.