Grappling with Ignorance: Frameworks from Decision Theory, Lessons from Literature

Abstract

Benefit-cost analysis (BCA), a discipline best known for guiding policy choices, can also guide personal decisions. In either application, traditional BCA tallies benefits and costs using market values or willingness to pay. When future outcomes are uncertain, as they are across a wide array of situations, BCA must call as well on the methods of decision analysis. Thus, von Neumann-Morgenstern utilities, subjective probabilities, and sequential decision strategies are brought into play. Traditional decision analysis distinguishes between risk and uncertainty. With risk, the probabilities of possible outcomes are known; with uncertainty, those outcomes are known, but not their probabilities. We introduce the concept of ignorance: a third, less tractable category. With ignorance, even the possible outcomes of decisions cannot be identified. Ignorance takes particular importance when high payoffs are associated with these unidentified outcomes, as is often the case. We identify such outcomes as consequential amazing developments (CADs). In the policy realm, the 2008 financial meltdown or the Arab Spring would represent a CAD. For an individual, a CAD might be that one's secure tenured position had been inexplicably terminated, or that one's trusted business partner had long been shuttling corporate secrets to a competitor. We distinguish between unrecognized and recognized ignorance. In the latter category, we identify specific cognitive biases that impair decision making. Consequential ignorance cannot be studied in a controlled laboratory setting, since its payoffs are high, its time delays often long, and merely introducing the subject would tend to give away the game. Thus we develop a descriptive understanding of ignorance drawing on great works of literature, from antiquity to the present day, positing that skilled writers understand how humans make decisions and respond to unanticipated outcomes. Shakespearean examples would be Hamlet's ignorance of his father's killer, and Macbeth's lack of awareness of the tragic ramifications following his actions to seize the Scottish crown. Following this descriptive analysis, we turn to prescription. We draw on decision analysis to develop a formula for calculating consequential ignorance; it

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“…Nevertheless, both events represented instances of uncertainty, not risk—their probabilities were both unknown and highly ambiguous. More appropriately, we believe that they should be thought of as situations of ignorance, where even the possible states of the world are not known . Indeed, these events reflect a much deeper level of ignorance than simply having imprecise priors.…”

“…More appropriately, we believe that they should be thought of as situations of ignorance, where even the possible states of the world are not known. (13) Indeed, these events reflect a much deeper level of ignorance than simply having imprecise priors. Few people even contemplated the possibility of such attacks.…”

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