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12 May 2020  (730 Views) 
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Out of the box


Risk management concept
Some people argued that human life is valuable and that every effort should be made to save every human life and that money should not be an issue.

This is an irrational approach. 

The flaws in this argument are:

a) There are 56 million deaths every year.  If every life is valuable, how much would the 56 million lives be worth? Do we have unlimited wealth to save all of these lives?

b) Even after the entire wealth of a family is spent to save the life, what is the chance of success? Will the saved life last very long?

We need to have a rational approach towards this kind of problem.

It may be all right to spend $100,000 to save a life, it there is a high chance of success, maybe 10% or higher.  Should this sum be spent when the chance of success is 1% or lower? 

Some people will say that they will spend they sum to try to save the life, but in the process, they are more likely (actually 99%) to lose the $100,000, than to save the life. The loss of $100,000 could cause harm to the family, as they need the money to meet to feed their children and help them through their future. Should be limited wealth of the family be spent in this way?

Surely, if the chance is only 1%, why not try another method where the cost is lower (say $10,000) and the chance of success is marginally lower, say 0.5%?

In risk management, the expected value is found as follows:

Option 1: Expense $100,000, chance of recovery 1%, total expected value of success $10 million

Option 2: Expense $10,000, chance of recovery 0.5%, total expected value $2 million.

Option 2 is less costly, but it is still a large sum. So, it is better to try option 2, although the chance of success is lower than option 1.

The irrational approach is that we should spend an unlimited sum to save a human life, even if the chance is very low.

Tan Kin Lian

Vote - should decisions be made rationally using the risk management concepts?
 


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