ENGINEERING DECISIONS UNDER RISK-AVERSENESS∗

Abstract. Engineering decisions are invariably made under substantial uncertainty about current and future system cost and response, including cost and response associated with low-probability, high-consequence events. A risk-neutral decision maker would rely on expected values when comparing designs, while a risk-averse decision maker might adopt nonlinear utility functions or failure probability criteria. The paper shows that these models for making decisions are related to a framework of risk measures that includes many possibilities. We describe how risk measures provide an expanded set of models for handling risk-averse decision makers. General recommendations for selecting risk measures lead to decision models for risk-averse decision making that comprehensively represent risks in engi-neering systems, avoid paradoxes, and accrue substantial benefits in subsequent risk, reliability, and cost optimization. The paper provides an overview of the framework of decision making based on risk measures