Integrating risk perceptions in a value of information framework using cumulative prospect theory

Abstract

Value of information (VoI) analysis provides a framework that can be used to decide on an optimal monitoring strategy, to carry out an efficient maintenance of civil infrastructure. Existing VoI frameworks adopt utility functions to characterize the risk appetite of an asset manager based on expected utility theory (EUT). However, these utility functions cannot predict the decision choices under uncertainty resulting from failure risk perceptions. Cumulative prospect theory (CPT) is a comprehensive model for characterizing an asset manager’s risk appetite and perception. CPT captures both, the preference for different action outcomes using a value function and corresponding risk perceptions exhibited by an asset manager using a probability weight function. The present study proposes a CPT-based VoI framework which integrates risk perceptions and appetite within the VoI analysis. The proposed framework is implemented to investigate the sensitivity of the resulting expected VoI and the monitoring decisions to risk perception profiles. It is observed that the VoI is sensitive to the risk perception profile of an asset manager. An in-depth analysis of the decision patterns reveal that the risk profile affects the choice of prior optimal action that in turn dictates which type of posterior actions contribute positively or negatively towards the cost savings when referenced to the cost of prior optimal action. Based on these finding, the paper recommends to calibrate an asset manager’s risk perception profile to predict the decisions that an asset manager perceives as optimal for a given failure risk, and to evaluate the expected VoI resulting from such decisions.