Advanced Risk Analysis in Engineering Enterprise Systems

3

Foundations of Risk and Decision Theory

3.1      Introduction

This chapter introduces the mathematical foundations of risk and decision theory. Topics include elements of probability theory—the original formalism for studying the nature of risk. This is followed by an introduction to modern decision theory and how it aids human judgment in the presence of uncertainty. The chapter concludes with a discussion on how these topics apply to the analysis of risk in engineering systems.

3.2      Elements of Probability Theory

Whether it is a storm’s intensity, an arrival time, or the success of a decision, the word “probable” or “likely” has long been part of our language. Most people have an appreciation for the impact of chance ...