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Bringing social standards into project evaluation under dynamic uncertainty.

Odin K Knudsen1, Pasquale L Scandizzo

  • 1University of Rome, Tor Vergata, Rome, Italy.

Risk Analysis : an Official Publication of the Society for Risk Analysis
|May 7, 2005
PubMed
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Social standards set damage thresholds requiring compensation. This study shows how uncertainty influences investment decisions and project abandonment when exceeding these standards, integrating social standards into cost-benefit analysis.

Area of Science:

  • Environmental Economics
  • Decision Analysis

Background:

  • Societal damage thresholds necessitate compensation.
  • Investment decisions face dynamic uncertainty and externalities.

Purpose of the Study:

  • Analyze interdependence between social standards and investment evaluation under uncertainty.
  • Integrate social standards into cost-benefit analysis for dynamic environments.

Main Methods:

  • Real-option theory
  • Simple economic models
  • Development and liability options
  • Damage function integration

Main Results:

  • Social standards act as safety targets, not rigid barriers, under uncertainty.

Related Experiment Videos

  • Uncertainty increases tolerance for exceeding damage thresholds.
  • Models demonstrate integrating social standards via options and damage functions.

    • Conclusions:

    • Investment and abandonment decisions must account for dynamic social standards.
    • Uncertainty management is key to navigating environmental and social risks.
    • Cost-benefit analysis can be enhanced by incorporating liability and development options.