Calculating and Describing Uncertainty in Risk Assessment: The Bayesian Approach

Abstract Quantification of uncertainty associated with risk estimates is an important part of risk assessment. In recent years, use of second-order distributions, and two-dimensional simulations have been suggested for quantifying both variability and uncertainty. These approaches are better interpreted within the Bayesian framework. To help practitioners better use such methods and interpret the results, in this article, we describe propagation and interpretation of uncertainty in the Bayesian paradigm. We consider both the estimation problem where some summary measures of the risk distribution (e.g., mean, variance, or selected percentiles) are to be estimated, and the prediction problem, where the risk values for some specific individuals are to be predicted. We discuss some connections and differences between uncertainties in estimation and prediction problems, and present an interpretation of a decomposition of total variability/uncertainty into variability and uncertainty in terms of expected squared error of prediction and its reduction from perfect information. We also discuss the role of Monte Carlo methods in characterizing uncertainty. We explain the basic ideas using a simple example, and demonstrate Monte Carlo calculations using another example from the literature. Keywords: posterior distributionpredictionsimulationsquared error losssubjective probability.