Decision analysis and risk management : application to climate change and risk detection

We have analyzed the application of decision analysis and risk management tools to solve practical problems associated with Climate Change and Risk Detection in the financial services industry. Geoengineering, which is described as an intentional modification of earth’s environment to mitigate the harmful effects of climate change, is evaluated as a policy alternative using the aforementioned tools. We compared the performance of geoengineering with optimal emission controls and a business as usual strategy under various scenarios and found that geoengineering passes the cost benefit test for a majority of the scenarios. We modified the DICE model (Nordhaus, 2008) and used it to evaluate the performance of different environmental policies. Our results show geoengineering as a potential alternative to solve climate change problems. Through this application, and by comparing our findings against Goes et al. (2011), we showed that how framing of the decision problem can lead to completely different results. We also analyzed the application of risk management in the financial services industry. The industry faces three main types of risk: Market risk, Credit risk and Operational risk. Market risk is managed using a diversified portfolio, derivatives, insurance and contracts. More challenging is the task of preventing credit and fraud risk. Statistical models used by the industry to detect and prevent these types of risk are explained in the thesis.