ABSTRACT
There are two classes of decision making methodologies: economic and noneconomic. An-
other useful division is descriptive and normative theories of decision making. Descriptive
theory of decision making represents preferences of individuals as they are. However, nor-
mative theories model individual’s beliefs structure following certain rules of consistency. As
these are controversial views, we only discuss economic and noneconomic division in this
book. The economic methodologies make the decisions based on a value (actual measurable
monetary value or subjective value) assigned to risk (or loss). This value can be absolute or
relative. Examples of economic-based methods that will be addressed in this chapter are cost-
benefit, cost-effectiveness, and risk-effectiveness methods. The noneconomic methodologies
include those that assign a value by experts or lay people to risk and other risk management
attributes such as cost and time. These values can be real measurable ones (such as losses
incurred by natural events), or values perceived by people as to the frequency or consequence
of certain events. Examples of these methods are loss of life expectancy, comparison to
natural risks, and expressed preference methods. Similar to the economic methodologies,
the values assigned to risk can be either relative or absolute. The noneconomic methods may
involve value judgments that assign (mostly subjective) values to the risk (frequency and
consequence) and benefits. Noneconomic methods that will be discussed in this chapter are
exceedance analysis, value analysis, decision tree, and analytical hierarchy process (AHP).