Magnitude Of Potential Losses Research Articles

Assessment of the risks of construction of transport infrastructure facilities

The paper is devoted to the analysis and risk assessment of a company engaged in the construction of transport infrastructure facilities. Using the method of expert assessments, the risks that the company may face at the stages of organizational and technological preparation and the construction stage were identified. Each risk was assessed from two perspectives. The first is the determination of the probability of risk occurrence (in percentages and fractions of units). The second is an assessment of the losses that the risk carries if it is realized (in shares of the planned profit). Based on the grouping (identifying four risk groups with different priorities) and calculating the weights of groups and risks, the risks of a construction company were assessed and ranked, and the most significant of them were identified. These are risks associated with shortcomings in design and survey work, reduced funding for construction work, low-skilled workers, as well as the risk of an increase in the cost of materials and structures, the risk of defects and technology violations. For visual demonstration and systematization of risks, the method of risk mapping was used. According to the results of the mapping study, the most dangerous risks are the risks of the “red” zone – these are the risks associated with the shortcomings of design and survey work and the risks of injury. The criterion for their inclusion in the “red zone” is high potential losses. When analyzing and assessing risks, in our opinion, it is necessary to use both of these methods, since based on the method of expert assessments using priority groups, the most significant factors and risks are identified, taking into account two components: the likelihood of their implementation and the magnitude of potential losses. The risk mapping method allows one to rank these risks and identify, on the one hand, risks with the highest probability of realization, on the other hand, risks that carry potentially high losses.

A GIS-Based Simulation Application to Model Surface Runoff Level in Urban Blocks

Simulation of flood inundation in urban areas longer important, given the magnitude of potential loss and disruption associated with non-river based, urban flooding. The complexity of the urban environment and lack of high-resolution topographic and hydrologic data compromise the development and implementation of models. Low impact development (LID) is technical know-how on a collection of sustainable practices that mimic natural hydrological functions including infiltration, evapotranspiration or use of surface runoff. Several studies have been carried out to discuss the impact of urbanization scenarios in reducing the urban flood risk in watershed scale in Sri Lanka. Yet, there is a gap remains in simulating the effectiveness of LID-based planning practices to reduce flood risk with the complex built form scenarios. In such a situation, this study attempts to make a significant contribution to simulate the variations of flood regulation functions under different high-intensive urban development scenarios, particularly focusing on the urban metropolitan regions. The analyses were carried out utilizing SWMM (Storm Water Management Model) which is open-source flood inundation simulation approach with the help of GIS in a more qualitative manner. The simulation results indicate that expanding built form scenarios increase the flood venerability for city functions, increasing inundation duration and LID scenarios able to reduce the surface runoff to reduce flood vulnerability at a significant level. The simulation results had been verified with the real ground situation (mean percentage change < 15.5%) which able to capture the thresholds of built form variation, as well as dynamic land uses and infrastructure supply which can be used as a tool for future planning practices and decision-making.

When to Walk Away and When to Risk It All

While one might expect athletes to be strongly averse to extending their career too long when there is a chance of losing everything due to a concussion or a catastrophic injury, experimental subjects consistently played longer than the optimal amount for risk-neutral decisions. A commitment to the length of play in advance, as in the case of long-term contracts, led to a greater chance of staying beyond the expected payoff-maximizing point. If the decision frame is altered so that decisions are made in each period rather than through an upfront commitment, the magnitude of potential losses is more evident.

When to Walk Away and When to Risk It All

While one might expect athletes to be strongly averse to extending their career too long when there is a chance of losing everything due to a concussion or a catastrophic injury, experimental subjects consistently played longer than the optimal amount for risk-neutral decisions. A commitment to the length of play in advance, as in the case of long-term contracts, led to a greater chance of staying beyond the expected payoff-maximizing point. If the decision frame is altered so that decisions are made in each period rather than through an upfront commitment, the magnitude of potential losses is more evident.

The Feasibility of Reverse Mortgages in Japan

This paper examines the feasibility of reverse mortgages in Japan by utilizing stochastic modeling to characterize the movements of three stochastic variables—interest rates, property values and mortality—underpinning the value of reverse mortgages. We use the yield curve to forecast future interest rates, taking into account the interest arbitrage condition and the term premium. We employ hedonic modelling to develop a house price index for Japan, and then use two times series method—Brownian Motion and Bootstrapping—to forecast house prices. We take the Japanese Ministry of Health, Labor and Welfare life expectancy tables to model mortality. We then integrate these three variables into our default risk estimation model in which we predict the magnitude of potential losses associated with default risk. Our simulation results show that home equity withdrawal rates matter significantly in determining the magnitude of tail risk and that line of credits plan and combination plans increase the feasibility of reverse mortgages in Japan. We also find that the increasing (50bps) risk premiums does not significantly increase the default risk (and of course allows for the buildup of a larger insurance fund). On the one hand, the risk premiums (or spreads) are set to capture the default risk and non-recourse risk. On the other hand, this hedging mechanism will in turn increase the default risk itself by ballooning the unpaid mortgage balance over time, thus generating an endogenous interest rate cycle.

Selective insensitivity for losses but not gains in decision making under risk among the poor

We analyzed decision making under risk in a group of 50 poor individuals and a group of 50 rich individuals from the city of Lima, Peru, using the Columbia Card Task game. Contrary to the decisions of the rich, the decisions of the poor were insensitive to changes in the magnitude of potential losses: the risk taking of the poor did not increase when potential losses were low compared to when they were high. The decisions of the poor were also significantly less sensitive to changes in the probability of potential losses, compared to those of the rich. On the contrary, similarly to the decisions of the rich, the decisions of the poor were significantly sensitive to changes in the gain amount: risk taking was higher when the gain amount was higher than when it was lower. The rich sample from Lima showed a similar pattern of risk-taking behavior as other non-poor populations from previous studies. Furthermore, the poor scored higher on the perceived constraints scale and showed the same level of unrealistic optimism for negative events, but less unrealistic optimism for positive events, than the rich.

Assessing the potential of translocating vulnerable forest birds by searching for novel and enduring climatic ranges.

Hawaiian forest birds are imperiled, with fewer than half the original >40 species remaining extant. Recent studies document ongoing rapid population decline and project complete climate‐based range losses for the critically endangered Kaua'i endemics ‘akeke’e (Loxops caeruleirostris) and ‘akikiki (Oreomystis bairdi) by end‐of‐century due to projected warming. Climate change facilitates the upward expansion of avian malaria into native high elevation forests where disease was historically absent. While intensified conservation efforts attempt to safeguard these species and their habitats, the magnitude of potential loss and the urgency of this situation require all conservation options to be seriously considered. One option for Kaua’i endemics is translocation to islands with higher elevation habitats. We explored the feasibility of interisland translocation by projecting baseline and future climate‐based ranges of ‘akeke’e and ‘akikiki across the Hawaiian archipelago. For islands where compatible climates for these species were projected to endure through end‐of‐century, an additional climatic niche overlap analysis compares the spatial overlap between Kaua’i endemics and current native species on prospective destination islands. Suitable climate‐based ranges exist on Maui and Hawai'i for these Kaua'i endemics that offer climatically distinct areas compared to niche distributions of destination island endemics. While we recognize that any decision to translocate birds will include assessing numerous additional social, political, and biological factors, our focus on locations of enduring and ecologically compatible climate‐based ranges represents the first step to evaluate this potential conservation option. Our approach considering baseline and future distributions of species with climatic niche overlap metrics to identify undesirable range overlap provides a method that can be utilized for other climate‐vulnerable species with disjointed compatible environments beyond their native range.

Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset

This study examines risk premia in a laboratory market featuring a long-lived asset. The research is enabled by prevention of the persistent bubbles and crashes endemic to laboratory markets utilizing long-lived assets. Positive, statistically significant risk premia are reported, in support of standard asset pricing models. Potential determinants of the risk premia are investigated. These risk premia are not sensitive to expected variance, but do vary positively with the magnitude of potential loss. Also investigated is the influence of Knightian uncertainty on market behavior. Positive premia for uncertainty are absent. However, and perhaps surprisingly, uncertainty significantly increases trading volume. An explanation consistent with microeconomic theory is discussed.

Defining Insurance Models within Climate Change European Policies

The paper outlines the role of insurance as a political economic tool that can be used to face the issue of climate change. The magnitude of potential loss, the adverse social and economic consequences for millions of people and considerable fiscal strain imposed on the government budget by weather disasters indicate that governments can benefit significantly from the use of insurance instrument that would seamlessly not only cover damage but also incentivate risk reduction behaviours. Looking at the diversity of existing insurance systems in European countries, natural hazards insurance is examined in terms of private and public involvement, taking into account the EU climate change policies framework. The paper analyses the economic efficiency of different insurance models in relation to the informational imperfections, i.e. adverse selection, moral hazard, and market imperfection, i.e. charity hazard and transaction costs. Moreover, the different models are considered for the way they likely affect incentives to address climate change seeking mechanism to facilitate the mitigation of greenhouse gas emissions, the adaptation to the inevitable impacts of climate change, and the development of climate risk financial management. Conclusive remarks are presented about the possible future development of an European insurance system to find an economic efficient response to natural hazards caused by climate change.

Insurance models and European climate change policies: an assessment

The paper outlines the role of insurance as an economic policy tool that can be used to address the issue of climate change. The magnitude of potential loss, the adverse social and economic consequences for millions of people and considerable fiscal strain imposed on government budgets by extreme weather events all indicate that governments can benefit significantly from the use of an insurance instrument capable not only of covering damage but also of providing an incentive for risk reduction behaviours. By examining the diverse insurance systems that exist in European countries and grouping them into five stylised models, natural hazards insurance is examined in terms of private and public involvement. The paper analyses the performance of different insurance models in relation to information imperfections (i.e. adverse selection and moral hazard) and market imperfections (i.e. charity hazard and transaction costs). In addition, the different models are examined in terms of the extent to which they incentivise mechanisms that facilitate the mitigation of greenhouse gas emissions, adaptation to the inevitable impacts of climate change and the development of climate risk finance management. Some concluding remarks are offered regarding the possible future development of a European insurance model as a means of developing an economically effective response to natural hazards caused by climate change.

Loss potentials associated with European windstorms under future climate conditions

Possible changes in the frequency and intensity of windstorms under future climate conditions during the 21st century are investigated based on an ECHAM5 GCM multi-scenario en- semble. The intensity of a storm is quantified by the associated estimated loss derived with using an empirical model. The geographical focus is 'Core Europe', which comprises countries of Western Europe. Possible changes of losses are analysed by comparing ECHAM5 GCM data for recent (20C, 1960 to 2000) and future climate conditions (B1, A1B, A2; 2060 to 2100), each with 3 ensemble members. Changes are quantified using both rank statistics and return periods (RP) esti- mated by fitting an extreme value distribution using the peak over threshold method to potential storm losses. The estimated losses for ECHAM5 20C and reanalysis events show similar statistical features in terms of return periods. Under future climate conditions, all climate scenarios show an increase in both frequency and magnitude of potential losses caused by windstorms for Core Eu- rope. Future losses that are double the highest ECHAM5 20C loss are identified for some countries. While positive changes of ranking are significant for many countries and multiple scenarios, signif- icantly shorter RPs are mostly found under the A2 scenario for return levels correspondent to 20 yr losses or less. The emergence time of the statistically significant changes in loss varies from 2027 to 2100. These results imply an increased risk of occurrence of windstorm-associated losses, which can be largely attributed to changes in the meteorological severity of the events. Additionally, fac- tors such as changes in the cyclone paths and in the location of the wind signatures relative to highly populated areas are also important to explain the changes in estimated losses.

GREED, LEVERAGE, AND POTENTIAL LOSSES: A PROSPECT THEORY PERSPECTIVE

This paper quantifies the notion of greed, and explores its connection with leverage and potential losses, in the context of a continuous‐time behavioral portfolio choice model under (cumulative) prospect theory. We argue that the reference point can serve as the critical parameter in defining greed. An asymptotic analysis on optimal trading behaviors when the pricing kernel is lognormal and the S‐shaped utility function is a two‐piece CRRA shows that both the level of leverage and the magnitude of potential losses will grow unbounded if the greed grows uncontrolled. However, the probability of ending with gains does not diminish to zero even as the greed approaches infinity. This explains why a sufficiently greedy behavioral agent, despite the risk of catastrophic losses, is still willing to gamble on potential gains because they have a positive probability of occurrence whereas the corresponding rewards are huge. As a result, an effective way to contain human greed, from a regulatory point of view, is to impose a priori bounds on leverage and/or potential losses.

Securitization, Insurance, and Reinsurance

AbstractThis article considers strengths and weaknesses of reinsurance and securitization in managing insurable risks. Traditional reinsurance operates efficiently in managing relatively small, uncorrelated risks and in facilitating efficient information sharing between cedants and reinsurers. However, when the magnitude of potential losses and the correlation of risks increase, the efficiency of the reinsurance model breaks down, and the cost of capital may become uneconomical. At this juncture, securitization has a role to play by passing the risks along to broader capital markets. Securitization also serves as a complement for reinsurance in other ways such as facilitating regulatory arbitrage and collateralizing low‐frequency risks.

A GIS-based model for urban flood inundation

Summary Modeling flood inundation in an urban setting is increasingly relevant given the magnitude of potential loss and disruption associated with non-riverine, urban flooding. Both complexities in the urban environment and lack of high-resolution topographic and hydrologic data compromise the development and implementation of models of non-riverine flooding in urban areas. This paper describes a case study analysis of an urban university campus to develop and test a GIS-based urban flood inundation model (GUFIM). The model consists of two components: a storm–runoff model and an inundation model. Cumulative surface runoff, output of the storm–runoff model, serves as input to the inundation model. The storm–runoff model adapts the Green–Ampt model to compute infiltration based on rainfall characteristics, soil properties, and drainage infrastructure conveyance. The basis of the inundation model is a flat–water model. This effort uses publicly available elevation data, storm data, and insurance claim data to develop, implement and verify the model approach. GUFIM is an alternative to physical-based dynamic models characterized by accurate results, efficient performance, and reasonable input and hardware requirements. The University of Memphis in Memphis, Tennessee is the study location used here.

Integrating Governance and Risk-Preference in Banking Institutions

All banks must hold capital equal to the minimum regulatory requirement. However, in many cases the level of regulatory capital diverges from the actual (economic) capital held by banks. A bank's actual capital is typically linked to a target credit rating, which is in turn determined by the probability of default. If actual capital held by the bank is allocated against the positions/portfolios held by managers, and performance measured against this capital base, it could be that capital at risk is driven more by external forces such as ratings agencies, or the prerogative of senior executives in the bank, rather than a disciplined and consistent analysis of risk based on the entire distribution of potential outcomes - both upside and downside. Subject to the chosen risk measure and the structure of compensation packages within the bank, managers and traders may be incentivised to take on higher risk portfolios than deemed appropriate by the centre because a capital charge based on the actual capital held by the bank - in turn based on target credit rating - is invariant to the magnitude of potential losses. The basis upon which the risk measure is formulated is thus critical to incentive compatibility between principal and agent within the bank. In this paper we discuss the risk preference functions for the various stakeholders of a bank, regulators, depositors, debt holders, shareholders and management. We further put the risk preference functions in context of actual (economic) capital held by the bank based on the bank's desired external credit rating and discuss further issues resulting from the aggregation of capital for stand-alone risks.

An investigation of risk perception and risk propensity on the decision to continue a software development project

Many information system (IS) failures may result from the inadequate assessment of project risk. To help managers appraise project risk more accurately, IS researchers have developed a variety of risk assessment tools including checklists and surveys. Implicit in this line of research, however, is the assumption that the use of such devices will lead to more accurate risk perceptions that will, in turn, lead to more appropriate decisions regarding project initiation and continuation. Little is known, though, about the factors that influence risk perception or the interrelationships that exist among risk perception, risk propensity, and decisions about whether or not to continue a project. Without a better understanding of these relationships it is difficult to know whether the application of risk instruments will be an effective means for reducing the incidence of IS failure. This study presents the results of a laboratory experiment designed to: (1) examine the relative contribution of two factors that are believed to shape risk perception: probability that a loss will occur and the magnitude of the potential loss, and (2) explore the relative influence of risk perception and risk propensity on the decision of whether or not to continue a software development project. The results indicate that magnitude of potential loss is the more potent factor in shaping risk perception and that a significant relationship exists between risk perception and decision-making. The implications of these findings are discussed along with directions for future research.

Effects of Prior Gains on Risk-Taking Behavior by Children

60 8- to 10-yr.-old male Ss undertook a risk-taking task designed to assess the effects of both prior gains and magnitude of potential loss on children's subsequent risk preference. Contrary to research findings with adults, the children in the current study showed little concern about amount of potential loss. Virtually every S was apparently attempting to maximize gain. Decision time increased in the risk-taking task as a function of probability of loss but not magnitude of loss.