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August 2012

Citation: ELR 10725

Author: Daniel A. Farber

Our society has sophisticated techniques for analyzing risks that can be modeled and quantified. But other threats—often the most serious ones—do not fit the paradigm. These threats involve what the economist Frank Knight classified as “uncertainty” (where the likelihood of the peril is nonquantifiable) as opposed to “risk” (where the likelihood is quantifiable). Uncertainty is particularly pernicious in situations in which catastrophic outcomes are possible, but conventional decision tools are not equipped to cope with these potentially disastrous results; neither the risk analysis favored in the United States, nor the precautionary principle utilized by Europeans and others, is satisfactory in cases of uncertainty. This Article considers how we can use new advances in economics and decision theory to do better.

Daniel A. Farber is the Sho Sato Professor of Law and Chair of the Energy and Resources Group, University of California, Berkeley.

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