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Published on: September 12, 2014
Potential Surprise Theory as a Practical and Theoretical Cornerstone of the Uncertainty-Based Perspective on Risk
1Chester Business School, University of Chester, Queen's Park Campus, Chester, UK.
Summary
Potential Surprise Theory (PST) addresses knowledge gaps in risk analysis by using a non-probabilistic measure of uncertainty. This approach overcomes limitations in assigning probabilities to unknown scenarios, offering a new perspective on risk management.
Area of Science:
- Decision Sciences
- Economic Theory
- Risk Management
Background:
- Risk analysis relies on available knowledge, creating a gap for potential surprises.
- Economic decision-making faces uncertainty due to dynamic systems and limited foresight.
- G. L. S. Shackle's Potential Surprise Theory (PST) offers a framework for decisions under radical uncertainty.
Purpose of the Study:
- To introduce Potential Surprise Theory (PST) as a robust framework for uncertainty-based risk analysis.
- To demonstrate how PST overcomes the residual-hypothesis problem inherent in traditional risk assessment.
- To explore the theoretical and practical implications of PST for understanding and managing risk.
Main Methods:
- Juxtaposing PST with expected utility theory to highlight differences in handling uncertainty.
- Illustrating the concept of crucial experiments within the context of risk analysis.
- Describing PST's focus on possibility, surprises, and extreme outcomes.
- Discussing the operationalization of PST in practical risk analysis.
Main Results:
- PST provides a non-probabilistic, non-additive measure of uncertainty, resolving the issue of assigning probabilities to unknown future events.
- The theory frames decisions as crucial experiments that reshape the possibility space, acknowledging the kaleidic nature of economies.
- PST offers a unique language for possibility, emphasizing surprises and extreme scenarios often overlooked by probabilistic methods.
Conclusions:
- Potential Surprise Theory (PST) offers a valuable theoretical and practical foundation for the uncertainty-based perspective on risk.
- PST's focus on radical uncertainty and crucial experiments provides a more realistic approach to complex decision-making.
- The article advocates for greater attention to PST within risk analysis and economic decision theory.
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