Risk vs. Risk: Tradoffs in Protecting Health and the Environment

Edited by John D. Graham and Jonathan Baert Wiener (Harvard University Press paperback, 1997, $18.95)

Reviewed by Donald T. Bashline

Actuaries are in the midst of an effort to broaden their profession's scope. The recently circulated discussion draft of "General Principles of Actuarial Science" tells us that "The primary focus of actuarial work is on the financial and economic consequences of events involving risk and uncertainty." This is broad enough to be almost all-inclusive, especially since an "economic good" is later defined as "something that has value to a person and that the person can consider exchanging for something else." Clearly, the assessment of the consequences of such an expansively defined class of events demands an equally comprehensive array of evaluative techniques. Risk vs. Risk is a valuable introduction to the process of "risk tradeoff analysis" (RTA), a technique that may prove particularly useful to the actuary dealing with an unfamiliar, and perhaps less quantitatively tractable, set of uncertain events.

RTA provides the decision-maker a framework for evaluating the consequences of decisions intended to reduce risk, which the editors define as "the chance of an adverse outcome to human health, the quality of life or the quality of the environment." As a result of improvements in health care, pollution reduction, automobile safety, and other areas, such risks have been markedly reduced in recent years. But steps taken to reduce one kind of risk may at the same time act to increase risk from other directions. Removing carcinogenic chlorine compounds from our water supply leaves us vulnerable to microbial diseases. Farmers, no longer able to use DDT as a pesticide, switched to less persistent but more immediately toxic replacements.

In their introductory opening chapter, the editors lay out a methodology by which countervailing risks (those risks introduced when action is taken to reduce "target risks") may be classified and evaluated. A "risk offset" takes place when the countervailing risk is of the same character as the target risk: perhaps one carcinogenic pesticide is to be replaced by another. "Risk substitution" takes place when the countervailing risk is of a different nature from the target risk: auto manufacturers forced to build more fuel- efficient (and less polluting) vehicles made them smaller and thereby less safe. "Risk transfer" eliminates the risk for one population but transfers it to another, while "risk transformation" combines substitution and transfer, creating new risks for a previously unaffected population.

Awareness of interactions among different types of risk and consideration of decision-maker utilities make it possible (at least theoretically) to model risk tradeoffs along a risk protection frontier, analogous to the efficient frontier of modern portfolio theory. Decision-makers are thus able to model the entire set of implications of their actions: not just the effect on the target risk. The editors do not minimize the difficulties involved in either anticipating countervailing risks or in evaluating the net impact of any decision. Some of these present special challenges to which the actuary is already alert: how do we account for the timing of adverse outcomes? How do we deal with the uncertainty of estimates? Global warming, for instance, calls for decision-makers to take action now based on highly uncertain estimates of events occurring in the distant future. Actuaries have much to add to this discussion.

The heart of the book is a series of case studies presenting decision alternatives in the context of RTA. The case studies illustrate each of the risk tradeoff possibilities discussed above, and range from individual decisions (how to decide between an illness and the possible side effects of a curing drug?) to decisions that require worldwide cooperation (what are the relative risks of action and inaction given the threat of global warming?). While none of the case studies are directly related to an actuary's practice, each emphasizes the importance of thinking in a new way about risk, looking beyond the immediate goal of reduction in a target risk to the less obvious unintended consequences of an action.

In their concluding chapter, the editors discuss the reasons that countervailing risks are often ignored during the decision-making process, and suggest some remedies. Any actuary who has been involved in a collaborative decision-making process will recognize the problems dealt with here. One of the most pervasive is omitted voice: some affected parties are excluded from the process in favor of more organized interests. Problem-solving methods may also make the comprehensive approach of RTA difficult to implement. Decision-makers tend to react to crises, and deal with the most obvious symptoms of the most immediate problems. They also tend to disaggregate problems; this breaks problems into bite-sized pieces and so may make them easier to manage, but also makes the big picture harder to see. The increase in specialization rampant in most organizations also makes holistic decision making more difficult, since both expertise and accountability tend to become compartmentalized.

Decision-makers may also ignore the phenomenon of compensating behaviors: for example, workers may feel that improved protective equipment removes the need for safe behavior, resulting in a less-than-expected decrease in accidents. Also important is an organizational bias in favor of existing technology. Often new methods or technologies are rejected not because they are less effective or less safe than the old, but because they are evaluated using different and higher standards.

The editors make specific and practical suggestions for improving the organization's ability to more explicitly recognize countervailing risks. Using a medical analogy, they urge the decision-maker to "treat the whole patient," to supplement the necessary knowledge of the specialist with the broader point of view of the general practitioner. Additionally, specialists must communicate better with each other and with the generalists in charge of coordinating their efforts.

The editors conclude by noting the necessity not only for new techniques of decision making, but for a "cultural maturation" in which decision-makers would unblinkingly confront the complexities and interrelationships of a world in which important decisions often have unforeseen, but not unforeseeable, consequences. If actuaries are ever to fulfill their new, broader mandate, they had better heed this advice.