Application of cumulative prospect theory: Implied seismic design preference

Abstract

Optimal seismic design level can be prescribed based on the minimization of the expected lifecycle cost or the expected utility theory. Recently, behavioral economists and cognitive psychologists have developed the popular cumulative prospect theory (CPT) to describe observed decision making behavior. In this study, an attempt is made in applying the CPT to reveal the implied seismic design preference by decision makers of bounded rationality. An approach incorporating the CPT, seismic risk assessment, and lifecycle cost analysis is used to investigate the sensitivity of the implied seismic design preferences to risk attitudes and possible people’s overreaction and unawareness in facing low probability high consequence risk. The impact of model parameters of the adopted value and weighting functions on the design preference is assessed through numerical examples. In general, the implied seismic design preference does not coincide with that dictated by minimizing the expected lifecycle cost, and the intervals of the implied preferences for sets of admissible combinations of model parameters of the value and weighting functions are relatively wide and depend on the adopted reference point.