Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [26]
As we discussed in the Introduction, the world is becoming more and more like a small interdependent village: Crises that are ignored because they are occurring 5,000 miles away are increasingly likely to have important, and very rapid, second-order effects. Given this, we might reflect on an irony: Being selfish today means taking care of others. Without a doubt, this is a different picture for how to represent economic rationality based on self-interest.
Or, if you prefer, in Albert Camus’ own words: “Until now I always felt a stranger in this town, and that I’d no concern with you people. But now that I’ve seen what I have seen, I know that I belong here whether I want it or not. This business is everybody’s business.”
Welcome to Risk Management-Version 2.0.
RECOMMENDED READING
Auerswald, P., L. Branscomb, T. LaPorte. and E. Michel-Kerjan, eds. (2006). Seeds of Disaster, Roots of Response: How Private Action Can Reduce Public Vulnerability. New York: Cambridge University Press.
Dacy, D., and H. Kunreuther (1969). The Economics of Natural Disaster: Implications for Federal Policy. New York: The Free Press.
Froot, K., ed. (1999). The Financing of Catastrophe Risk. Chicago: University of Chicago Press.
Gladwell, M. (2000). The Tipping Point. New York: Little Brown.
Kunreuther, H., and G. Heal (2003). “Interdependent Security.” Journal of Risk and Uncertainty 26, nos. 2/3: 231-249.
Kunreuther, H., and E. Michel-Kerjan (2009). At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes. Cambridge, MA: MIT Press.
Lagadec, P., E. Michel-Kerjan, and R. Ellis (2006). “Disaster via Airmail: The Launching of a Global Reaction Capacity After the 2001 Anthrax Attacks.” Innovations 1, no. 2: 99-117.
PART TWO
ARE WE ASKING THE RIGHT QUESTIONS? ECONOMIC MODELS AND RATIONALITY
PART TWO (CHAPTERS 6 TO 10) provides a framework of ideas and concepts that is essential to understanding and appreciating the notion of rationality (at least as it is studied in the social sciences). These chapters, necessarily, are somewhat more technical than other parts of the book.
The first three offer an overview of how the debate about the use of models of rationality has evolved over time, what the different schools of thought are, how our approaches to decision making have changed over the past few decades, and why the notion of rationality itself is in constant flux. They also show how decision analysts are now using such models to contribute to a better world—for instance, by creating youth programs where teenagers are taught to apply decision-making tools so they are equipped to improve their own future. Along the way, we learn that people often make better decisions if they know that they will be required to explain or justify their choices to others after the fact—possibly a critical new process for the future of decision making.
Part Two also reveals some of the most recent technologies at our disposal to better measure decision processes. During the past ten years, many economists have teamed up with neurologists and brain scientists. This improbable marriage has proven to be a happy one and has led to the birth of a new discipline: neuroeconomics. Potential applications include areas as diverse as marketing, finance, national security, and health care—all of which make neuroeconomics an exciting focal point for the future.
6
A Two-Edged Sword
Implications of Decision Psychology for Decision Analysis
PAUL J. H. SCHOEMAKER
Decision analysis (DA) is an analytic discipline used to help people make better decisions by first structuring the problem carefully, then generating a good range of potential actions, assessing possible outcomes, and finally ranking actions by calculating expected values or utilities.1 Typical tools used include decision trees, probability estimation, risk attitude analyses, portfolio perspectives,