Catastrophe Aversion and Risk Equity in an Interdependent World

Catastrophe aversion and risk equity are important concepts both in risk management theory and practice. Keeney [Keeney RL (1980) Equity and public risk. Oper. Res. 28(3):527–534] was the first to formally define these concepts. He demonstrated that the two concepts are always in conflict. Yet his result is based on the assumption that individual risks are independent. It has therefore limited relevance for real-world catastrophic events. We extend Keeney’s result to dependent risks and derive the conditions under which more equity and more correlation between two risks imply a more catastrophic situation. We then generalize some of the results for multiple correlated risks.

This paper was accepted by Manell Baucells, decision analysis.