Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [15]
What research can be done on this topic? I argue that a good starting point would be to take a rule like the one described above—“commit only as far as you can predict”—and see how it performs in simulations that model different variations of the foggy-minefield paradigm. My suspicion—based on the work being done on simple decision rules in conventional environments3—is that heuristics that “work well” will be those that match the environment in critical ways.
As an example of such a simulation, imagine the following videogame, which I shall simply call “life.” You start with an endowment that has to be allocated across a portfolio of assets, and the goal is to cross a foggy minefield and reach the other side with a portfolio that has increased substantially in value. The assets in your portfolio differ in their characteristics. One, which simulates your health, decreases over time, but you can invest resources to reduce the speed of decrease. If this asset hits a specified value, you are out of the game (i.e., you die). The other assets are income-producing but differ in their rates of return and in how much you can invest. These variations are hard to predict—because of the fog. Some, for example, are more predictable than others (i.e., they are less affected by the fog). In the game, time is conceptually continuous but is represented by discrete periods: If you don’t make a specific decision during a given period to manage a specific asset, the asset will remain under the influence of the last time you made a decision concerning it. (This assumption is quite realistic; we all know that there are many things in our lives that will not change unless we decide to act upon them. If we delay our decision to act, things simply remain “as usual”—that is, the same as they were the last time we decided to change them.) And, of course, there are potential dangers in the form of mines that can explode and destroy your assets. You can, however, spend part of your resources to get some (imperfect) information.
Clearly, there are many issues involved in setting up the parameters of foggy minefields, including not only the one just described but also technical matters pertaining to creation of the actual simulation. However, in my opinion, the most interesting issue to investigate is the question of which decision rules, or heuristics, work effectively in foggy-minefield situations, as well as in variations of the game. How would different operational versions of the “commit only as far as you can predict” heuristic perform, and how sensitive would these be to changes in the game’s parameters? What other rules might experts in decision making suggest?
Finally, going beyond research, it would make sense to have such a game played systematically at schools (from kindergarten up to our elite universities). After all, and as we know too well, our children and grandchildren will also grow up facing the vagaries of foggy minefields and thus will need to know how to handle both subway and coconut uncertainty.
RECOMMENDED READING
Hogarth, R. M., and N. Karelaia (2007). “Heuristic and Linear Models of Judgment: Matching Rules and Environments.” Psychological Review 114, no. 3: 733-758.
Makridakis, S., R. M. Hogarth, and A. Gaba (2009). Dance with Chance: Making Luck Work for You. Oxford: Oneworld Publications.
Savage, L. J. (1954). The Foundations of Statistics. New York: John Wiley & Sons.
Taleb, N. N. (2007). The Black Swan: The Impact of the Highly Improbable. New York: Random House.
Winter, S. G., G. Cattani, and A. Dorsch (2007). “The Value of Moderate Obsession: Insights from a New Model of Organizational Search.” Organization Science 18, no. 3: 403-419.
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The More Who Die, the Less We Care
PAUL SLOVIC
A defining element of catastrophes