The utility of reliability and survival

Abstract

Reliability (survival analysis, to biostatisticians) is a key ingredient for making decisions that mitigate the risk of failure. The other key ingredient is utility. A decision theoretic framework harnesses the two, but to invoke this framework we must distinguish between chance and probability. We describe a functional form for the utility of chance that incorporates all dispositions to risk, and propose a probability of choice model for eliciting this utility. To implement the model, a subject is asked to make a series of binary choices between gambles and certainty. These choices endow a statistical character to the problem of utility elicitation. The workings of our approach are illustrated via a live example involving a military planner. The material is general because it is germane to any situation involving the valuation of chance.