Evaluating sustainability actions under uncertainty: the role of improbable extreme scenarios

Abstract

An optimality condition for sustainability actions under discounted expected utility is that, ex post, we should almost surely regret having adjusted them too much for risk. In other words, ex post, one would almost surely feel regret for "excess" precautionary saving, excess insurance and hedging coverage, or for excess risk-bearing. Moreover, for marginal investments whose impacts materialize in t years, t tending to infinity, their state-contingent present value tends to zero almost surely, in spite of the fact that their expected value is one. The value of sustainable actions is thus mostly derived from very improbable extreme scenarios.

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Reference

Christian Gollier, “Evaluating sustainability actions under uncertainty: the role of improbable extreme scenarios”, The Geneva Risk and Insurance Review, vol. 49, March 2024, pp. 59–74.