Operational Safety Economics

Genserik Reniers is Professor at the TU Delft (Safety Science Group, Faculty of Technology, Policy and Management, The Netherlands), Professor at the HUB campus of the KULeuven (CEDON, Faculty of Economics and Management, Belgium) and at the University of Antwerp (ARGoSS, Faculty of Applied Economic Sciences, Belgium).He received his PhD in Applied Economic Sciences from the University of Antwerp, after completing a Master's degree in Chemical Engineering at the Vrije Universiteit Brussels. His main research interests concern the collaboration and interaction between safety and security topics and socio-economic optimization within the chemical industry.Genserik has authored, co-authored, edited or co-edited more than 20 books in the field of safety and/or security in the process industries, and he is Receiving editor for the Journal of Loss Prevention in the Process Industries (JLPPI), and Associate Editor of Safety Science, two very well-known academic journals in the research field. He has taught safety and security economics (as part of larger courses) since 2006 both at the University of Antwerp and at the HUB-campus of the KULeuven.

• Preface xiDisclaimer xivAcknowledgements xvList of Acronyms xvii1 Introduction 11.1 The “Why” of Operational Safety 11.2 Back to the Future: the Economics of Operational Safety 31.3 Difficulties in Operational Safety Economics 41.4 The Field of Operational Safety within the Profitability of an Organization 51.5 Conclusions 6References 72 Operational Risk, Operational Safety, and Economics 82.1 Defining the Concept of Operational Risk 82.2 Dealing with Operational Risks 102.3 Types of Operational Risk 112.4 The Importance of Operational Safety Economics for a Company 152.5 Balancing between Productivity and Safety 182.6 The Safety Equilibrium Situation or “HRO Safety” 192.6.1 HRO Principle 1: Targeted at Disturbances 202.6.2 HRO Principle 2: Reluctant for Simplification 212.6.3 HRO Principle 3: Sensitive toward Implementation 212.6.4 HRO Principle 4: Devoted to Resiliency 212.6.5 HRO Principle 5: Respectful for Expertise 222.7 The Egg Aggregated Model (TEAM) of Safety Culture 222.8 Safety Futures 242.9 The Controversy of Economic Analyses 252.10 Scientific Requirements for Adequate Economic Assessment Techniques 262.11 Four Categories of Data 272.12 Improving Decision-making Processes for Investing in Safety 282.13 Conclusions 29References 303 Economic Foundations 313.1 Macroeconomics and Microeconomics 313.2 Safety Demand and Long-term Average Cost of Production 323.2.1 Safety Demand 323.2.2 Long-term Average Cost of Production and Safety 333.3 Safety Value Function 353.4 Expected Value Theory, Value at Risk, and Safety Attitude 373.4.1 Expected Value Theory 373.4.2 Value at Risk 383.4.3 Safety Attitude 393.5 Safety Utilities 403.5.1 Safety Utility Functions 403.5.2 Expected Utility and Certainty Equivalent 413.6 Measuring Safety Utility Functions 423.7 Preferences of Safety Management – Safety Indifference Curves 433.8 Measuring Safety Indifference Curves 453.8.1 Questionnaire-based Type I Safety Indifference Curves 453.8.2 Problems with Determining an Indifference Curve 483.8.3 Time Trade-off-based Safety Utilities for Type II Safety Indifference Curves 483.9 Budget Constraint and n-Dimensional Maximization Problem Formulation 503.10 Determining Optimal Safety Management Preferences within the Budget Constraint for a Two-dimensional Problem 523.11 Conclusions 54References 544 Operational Safety Decision-making and Economics 554.1 Economic Theories and Safety Decisions 554.1.1 Introduction 554.1.2 Expected Utility Theory 564.1.3 Prospect Theory 564.1.4 Bayesian Decision Theory 604.1.5 Risk and Uncertainty 604.1.6 Making a Choice Out of a Set of Options 624.1.7 Impact of Affect and Emotion in the Process of Making a Choice between Alternatives 644.1.8 Influence of Regret and Disappointment on Decision-making 644.1.9 Impact of Intuition on Decision-making 654.1.10 Other Influences while Making Decisions 664.2 Making Decisions to Deal with Operational Safety 664.2.1 Introduction 664.2.2 Risk Treatment Option 1: Risk Reduction 674.2.3 Risk Treatment Option 2: Risk Acceptance 694.2.4 Risk Treatment 704.2.5 The “Human Aspect” of Making a Choice between Risk Treatment Alternatives 744.3 Safety Investment Decision-making – a Question of Costs and Benefits 764.3.1 Costs and Hypothetical Benefits 764.3.2 Prevention Benefits 784.3.3 Prevention Costs 784.4 The Degree of Safety and the Minimum Overall Cost Point 794.5 The Type I and Type II Accident Pyramids 834.6 Quick Calculation of Type I Accident Costs 854.6.1 Accident Metrics 864.6.2 A Quick Cost-estimation Approach for Type I Risks 874.7 Quick Calculation of Type II Accident Costs 884.7.1 Introduction to a Study on Type II Event Decision-making 884.7.2 Results of the Study on Type II Event Decision-making 904.7.3 Results by Gender 924.7.4 Rational and Intuitive Thinking Styles 924.7.5 Conclusions of the Study on Type II Event Decision-making 944.8 Costs and Benefits and the Different Types of Risk 954.9 Marginal Safety Utility and Decision-making 974.10 Risk Acceptability, Risk Criteria, and Risk Comparison – Moral Aspects and Value of (Un)safety and Value of Human Life 1014.10.1 Risk Acceptability 1014.10.2 Risk Criteria and Risk Comparison 1044.10.3 Economic Optimization 1104.10.4 Moral Aspects and Calculation of (Un)safety, Monetizing Risk and Value of Human Life 1114.11 Safety Investment Decision-making for the Different Types of Risk 1234.11.1 Safety Investment Decision-making in the Case of Type I Risks 1234.11.2 Safety Investment Decision-making for Type II Risks 1264.11.3 Calculation of the Disproportion Factor, taking Societal Acceptability of Risks into Account 1304.12 Conclusions 142References 1425 Cost-Benefit Analysis 1495.1 An Introduction to Cost-Benefit Analysis 1495.2 Economic Concepts Related to Cost-Benefit Analyses 1505.2.1 Opportunity Cost 1505.2.2 Implicit Value of Safety 1515.2.3 Consistency and Uniformity of Safety Investment Decisions 1525.2.4 Decision Rule, Present Values, and Discount Rate 1545.2.5 Different Cost-Benefit Ratios 1575.3 Calculating Costs 1585.3.1 Safety Measures 1585.3.2 Costs of Safety Measures 1585.4 Calculating Benefits (Avoided Accident Costs) 1755.4.1 Distinction between Various Accident Costs 1765.4.2 Avoided Accident Costs 1785.4.3 Investment Analysis (Economic Concepts Related to Type I Risks) 2005.5 The Cost of Carrying Out Cost-Benefit Analyses 2015.6 Cost-Benefit Analysis for Type I Safety Investments 2025.7 Cost-Benefit Analysis for Type II Safety Investments 2025.7.1 Introduction 2025.7.2 Quantitative Assessment Using the Disproportion Factor 2045.7.3 Decision Model 2065.7.4 Simulation on Illustrative Case Studies 2085.7.5 Recommendations with Regard to Using the DF0 2165.8 Advantages and Disadvantages of Analyses Based on Costs and Benefits 2165.9 Conclusions 217References 2176 Cost-effectiveness Analysis 2196.1 An Introduction to Cost-effectiveness Analysis 2196.2 Cost-effectiveness Ratio 2206.3 Cost-effectiveness Analysis Using Constraints 2226.4 User-friendly Approach for Cost-effectiveness Analysis under Budget Constraint 2236.4.1 Input Information 2236.4.2 Approach Cost-effectiveness Working Procedure and Illustrative Example 2256.4.3 Illustrative Example of the Cost-effectiveness Analysis with Safety Budget Constraint 2266.4.4 Refinements of the Cost-effectiveness Approach 2276.5 Cost-effectiveness Calculation Often Used in Industry 2326.6 Cost–Utility Analysis 2336.7 Conclusions 233References 2337 Beyond the State-of the Art of Operational Safety Economics: Bayesian Decision Theory 2357.1 Introduction 2357.2 Bayesian Decision Theory 2377.2.1 The Criterion of Choice as a Degree of Freedom 2377.2.2 The Proposed Criterion of Choice 2407.2.3 The Algorithmic Steps of the Bayesian Decision Theory 2417.3 The Allais Paradox 2417.3.1 The Choosing of Option 1B 2427.3.2 The Choosing of Option 2A 2437.3.3 How to Resolve an Allais Paradox 2457.4 The Ellsberg Paradox 2457.5 The Difference in Riskiness Between Type I and Type II Events 2477.5.1 Outcome Probability Distributions with Equal Expectation Values 2477.5.2 The Risk of the Type I Event 2487.5.3 The Risk of the Type II Event 2497.5.4 Comparing the Risks of the Type I and Type II Events 2507.6 Discussion 2517.7 Conclusions 253References 2538 Making State-of-the-Art Economic Thinking Part of Safety Decision-making 2548.1 The Decision-making Process for an Economic Analysis 2548.2 Application of Cost-Benefit Analysis to Type I Risks 2568.2.1 Safety Investment Option 1 2578.2.2 Safety Investment Option 2 2598.3 Decision Analysis Tree Approach 2628.3.1 Scenario Thinking Approach 2638.3.2 Cost Variable Approach 2638.4 Safety Value Function Approach 2678.5 Multi-attribute Utility Approach 2708.6 The Borda Algorithm Approach 2728.7 Bayesian Networks in Relation to Operational Safety Economics 2748.7.1 Constructing a Bayesian Network 2748.7.2 Modeling a Bayesian Network to Analyze Safety Investment Decisions 2768.8 Limited Memory Influence Diagram (LIMID) Approach 2808.9 Monte Carlo Simulation for Operational Safety Economics 2848.10 Multi-criteria Analysis (MCA) in Relation to Operational Safety Economics 2868.11 Game Theory Considerations in Relation to Operational Safety Economics 2928.11.1 An Introduction to Game Theory 2928.11.2 The Prisoner’s Dilemma Game 2948.11.3 The Prisoner’s Dilemma Game Involving Many Players 2958.12 Proving the Usefulness of a Disproportion Factor (DF) for Type II Risks: an Illustrative (Toy) Problem 2978.12.1 The Problem of Choice 2978.12.2 The Expected Outcome Theory Solution 2988.12.3 The Expected Utility Solution 2998.12.4 The Bayesian Decision Theory Solution 3008.12.5 A Numerical Example Comparing Expected Outcome Theory, Expected Utility Theory, and Bayesian Decision Theory 3028.12.6 Discussion of the Illustrative (Toy) Problem – Link with the Disproportion Factor 3048.13 Decision Process for Carrying Out an Economic Analysis with Respect to Operational Safety 3058.14 Conclusions 308References 3099 General Conclusions 310Index 313

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