Uncertainty and Decision-Making

How long can an ecosystem endure pressures without collapsing? How high is the climate sensitivity? What are the long-term consequences of growing and consuming GMO? How much renewable energy is feasible? How many species can get extinct without destabilizing an ecosystem? What is the (future expected) value of biodiversity? How long will oil, coal and uranium last? How large are the dangers from nuclear power? These are a few important questions that are highly uncertain. We probably cannot answer them exactly – at least not ex ante. So, how to deal with uncertainty when it comes to decision-making?

In conventional economics, the common approach to almost every problem – from an investment in a new desk computer to climate change mitigation – is the cost-benefit analysis. You calculate the costs and the benefits of an action (when needed, you discount them), then compare them with each other – if the benefits are higher, the project is worth doing. Simple as it sounds, this approach, while making sense in normal business processes, bears many problems when applied to more complex issues. For instance when applied to environmental problems. One critical aspect is the mixture of irreversibility and non-substitutability, two inherent characteristics of environmental challenges. Another is uncertainty.

While it is common practice in environmental economics to largely ignore uncertainty – “best estimates” and the like are treated as if they were exact parameters -, some conventional economists have tried to account for uncertainty in their CBAs. An interesting example is the Stern Report on the economics of climate change. The authors didn’t simply assume that the best estimates from climate science are “certain”, but they applied the so-called Monte Carlo analysis. In this case, the uncertain variables are imputed as probability distribution functions and the modeling software is randomly “picking out” numbers from the distribution, producing hundreds of different “scenarios”. The range of these scenarios gives an idea about the underlying uncertainty and its implications.

Nevertheless, in some cases this seems not to be enough. As shown by Martin Weitzman, when the considered probability distribution functions are “fat-tailed” (i.e., the probability of extreme outcomes is not approaching zero) and there is much at stake (e.g., a stable climatic system), every cost-benefit analysis will be overrun by what he calls the Dismal Theorem. In short: whatever the concrete numbers imputed, if there is some probability of extreme (negative) outcomes, and if these outcomes would be catastrophic, then it will always be worthwhile to undertake much to prevent them.

Weitzman’s Dismal Theorem can be applied to many large, complex environmental problems (I named some examples in the opening paragraph). It is a mathematical expression of what is commonly called the precautionary principle.

The precautionary principle as a policy recommendation would make sense if people tended to risk-aversion. Indeed, as empirical studies have repeatedly shown, we are strongly risk-averse. Of course, there are exceptions – gambling addicts, stuntmen, bankers are a few of them. But on average people behave highly risk-averse. (Otherwise the insurance business wouldn’t be so profitable.) So, if the society is risk-averse, it would be appropriate to choose policies that reflect that. Indeed, it is what we see in our everyday life: public health insurance for instance. Tax-financed unemployment schemes. And so on. All these are some forms of the precautionary principle.

Surprisingly, in the area of environmental protection, this rule is not applied that often. Cost-benefit analyses are often called for despite the uncertainties involved (as well as non-substitutability, irreversibility and valuation issues). As shown above, CBA is not a very good tool in this field. The question is: what do alternatives look like?

I have no ready-made proposal. But it appears reasonable to rely more on public discussion or, more pathetically expressed, on democracy. Cost-benefit analyses are allegedly “objective” and “scientific”. Indeed, they would be – if there were no uncertainty, if changes to the environment were reversible, if environmental “goods and services” were easily valuable, if they were substitutable… But they are not. Therefore policy makers should turn their attention to the second-best – and this seems to be the precautionary principle in general, and more participation by the civil society in particular. This may be less scientific and less objective than the ideal (a sound CBA). But it certainly would be less subjective than an analysis in which arbitrary judgements by some technocrats and/or bureaucrats are necessarily involved.

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11 thoughts on “Uncertainty and Decision-Making

  1. ” But it certainly would be less subjective than an analysis in which arbitrary judgements by some technocrats and/or bureaucrats are necessarily involved.”

    I don’t think you are serious now?!?!.

    Regards,

  2. Why shouldn’t I? Or do you think that a (group of) scientist(s) and/or public servant(s) can make more objective decisions than those reached in a democratic process (public audits, referenda or whatever)? Of course, I mean only cases such as those described above, when “technocratic” solutions presum some arbitrary value judgements (be it monetization, treatment of uncertainty or irreversibility, discounting etc.).

    This is not to say that “ordinary people” always know better. But when it comes to decision making, I believe that informed public opinion is to be preferred to “expert” opinion, if the matter is not purely “scientific”.

  3. So you assume that public opinion is informed in all aspects of “life” and that level of the sum of all unit/personal perceptions/knowledge is of higher value than the expert opinion?
    In a properly functioning system there are no arbitrary decisions. They should be made in a process involving various experts at clearly defined levels. I know, it does not always work like that, sometimes it is convenient to yield to public pressure ie. comply with the demands of “informed public opinion” even if majority is wrong. However, you may say the public will have own experts – but then we get back to the starting point of our discussion.

    Regards,

  4. I guess, you got something wrong. Public opinion is not informed in all aspects of life. First, I emphasize: what I have written, regards only for some kinds of problems (especially environmental ones, but not only). In many cases expert opinion is enough – also because we don’t have time to deliberate on every detail (otherwise we would still stick to direct democracy). Second, I am not calling for just asking the public. They must be provided with information in the first place. Hence the audits I used as an example.

    In a properly functioning system there are no arbitrary decisions.

    Wrong. In properly functioning imaginary systems, maybe. But what I am writing about are problems with inherent uncertainty (that, in many cases, cannot be overcome), involving value judgements (deciding what to do about irreversibility cannot be done purely “scientifically”, it is a value judgement – the same is the case for valuation of environmental goods and services, or of human life). In such cases, scientists should prepare and present the scientific facts needed to reach an informed a decision. But they mustn’t make the decisions themselves. This would be equal to a “technocratic dictatorship”.

  5. “But they mustn’t make the decisions themselves. This would be equal to a “technocratic dictatorship”.”

    But they don’t. This is the reality. In today’s world decision making is not in the hands of the sceintists or engineers. Most often than not an advice of the experts is simply ignored for as long as it doesn’t suit the expectations.
    Experts do prepare foundations for an informed and scientifically justified decision – that is part of a properly developed process. Also expert’s value judgement is still of higher value if measured against public opinion or perceptions.

    Regards,

  6. Also expert’s value judgement is still of higher value if measured against public opinion or perceptions.

    Why, if I may ask? We are not talking about ethicists, as far as I can remember. Why is a value judgement by an economist more valuable than on reached through public deliberation?

    But they don’t. This is the reality.

    If they didn’t, I wouldn’t have written this post. The fact is that decisions in the field of environmental protection are often made without public reasoning (or with it, but in such a way that “well-informed” experts are imposing their value judgements over an uninformed public) – they are made by bureaucrats/public agencies etc.

    Most often than not an advice of the experts is simply ignored for as long as it doesn’t suit the expectations.

    Sometimes this is the case, too. But this is a wholly different problem. That decisions are made in an “purposedly” uninformed way is not the same as that they are made in an informed way but without embracing the experts’ value judgements (what I am calling for).

  7. “Why is a value judgement by an economist more valuable than on reached through public deliberation?”

    Value judgement does not hang in the thin air. It has its roots in one’s knowledge and experience. By definition, a person called expert in a specified field has knowledge and experience not available to wider population.

    regards,

  8. Value judgements do not hang in the thin air, indeed. But we already agreed that a process of informing the decision makers on the topic is important. So, there is knowledge – though maybe not enough. But since we are talking about topics stretching over many disciplines, an expert in one of them will probably not have enough knowledge on the others as well. Furthermore, as I said: decision making is not the job of experts. Their job is to advise and to inform. There are some reasons why we are pursuing democratic processes and not decision making by a small group of however well informed technocrats.

  9. I do not clai experts should make decisions. This is different issue. We both agree the problem is in what way information provided by experts is handled and how, based on experts’ work, decisions are made. In my view that is the “weakest link” of the process. I do not thin that so called public participation will change that. There are many factors at play. Possibly one should ask a simple question ( in fact directed at our democratic structures and systems): who serves whom? I will agree the wider public should be properly informed, things should be explained – that is frequently lacking.

    Regards,

  10. I thought we were talking about decision making all the time (see the post’s title)…;-)

    With regard to the rest of what you wrote today, I think we can so far agree with each other.

  11. “But it appears reasonable to rely more on public discussion or, more pathetically expressed, on democracy.”

    And I responded on August 20 , 2:37 pm above.
    ” In a properly functioning system there are no arbitrary decisions. They should be made in a process involving various experts at clearly defined levels. I know, it does not always work like that, sometimes it is convenient to yield to public pressure ie. comply with the demands of “informed public opinion” even if majority is wrong. However, you may say the public will have own experts – but then we get back to the starting point of our discussion.”

    Regards,

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