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Economics and Finance of Risk and of the Future

Economics and Finance of Risk and of the Future

Robert Kast, André Lapied

ISBN: 978-0-470-03282-4

Jun 2006

242 pages



This book uses real-world examples to show how individual and collective risks can be blended and treated in a reliable decision-making framework that draws its inspiration from decision theory and market based mechanisms. It then goes into deeper detail by looking at the implications of having to face risks (a) where some kind of probabilistic description is available and (b) where none is available, using the example of insurable risks vs non-insurable risks. Again, by using real-world examples it shows how decision-makers can cope with such situations by a proper understanding and use of modern financial techniques.

General Introduction.

Financial assets.


Uncertainty and precaution.

Problems: new methods and new instruments.

Presentation of the book.


Introduction to Part I.

1. Risks in a Public Project: The Millau Viaduct.

2. Individual Valuations and Economic Rationality.

2.1 Preferences on consequences and utilities of decisions.

2.2 Decisions, acts and contingent assets.

2.3 Criterion and individual valuation: averaging.

2.4 A simple decision theoretic model.

2.5 A general criterion of individual valuation.

2.6 The two main criteria for decision-making in front of a known probability distribution: paradoxes and limitations.

3. Aggregation of Individual Choices.

3.1 Public choices.

3.2 Market aggregation of individual preferences.

4. Individual and Collective Risk Management Instruments.

4.1 Decision trees.

4.2 Optimisation under constraints: mathematical programming.

4.3 Risk and cost–benefit analysis.

Concluding comments on Part I.


Introduction to Part II.

5. Insurable and Uninsurable Risks.

5.1 Insurance of risks with a known probability distribution.

5.2 Insurance of risks with uncertainties.

5.3 Non-insurable risks.

6. Risk Economics.

6.1 Laws of large numbers and the principles of insurance.

6.2 Risk aversion and applications to the demand for insurance 1.

6.3 Background risk.

6.4 Risk measures: variance and Value at Risk.

6.5 Stochastic dominance.

6.6 Aversion to risk increases.

6.7 Asymmetric information: moral hazard and adverse selection.

7. Marketed Risks.

7.1 A general theory of risk measurement.

7.2 Applications to risk valuation.

8. Management Instruments for Risk and for Uncertainty.

8.1 Choosing optimal insurance.

8.2 Insurance claims securitisation.

8.3 Valuing controversial risks.

Concluding comments on Part II.


Introduction to Part III.

9. Risk Businesses.

9.1 Lotteries and the gambling business.

9.2 Risks and investments.

9.3 Credit risk.

10. Valuation without Flexibilities.

10.1 The net present value.

10.2 Discounting.

10.3 Static models of financial market equilibrium pricing.

10.4 The value at risk.

11. Valuation with Options.

11.1 General theory of a dynamic measure of risks.

11.2 Applications to risk valuation.

12. Static and Dynamic Risk Instruments.

12.1 Static risk management instruments.

12.2 Managing flexibilities.

Concluding comments on Part III.

General Conclusion.

1. How to deal with controversies.

2. Look for market valuation.

3. Measuring time.