Ignorance: Lessons from the Laboratory of Literature

Abstract

Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful). – Warren Buffett, To the Shareholders of Berkshire Hathaway Inc., 2012 Economists, psychologists, and decision theorists try to distill the ways in which people in the real world make decisions. When outcomes are known, decision-making is pretty straightforward. Hence, across a broad range of circumstances, prescriptive decision-making approximates rational prescriptions. When outcomes are unknown, however, grave difficulties intrude. People choose poorly, at least as judged from the standpoint of the well-developed prescriptive theories built on Bayesian decision and expected utility. Unknown outcomes can be further classified into risk and uncertainty. Risk applies when probabilities are known, as they are at gambling tables, or for insurance companies that have vast amounts of data on individual risks. Uncertainty prevails when

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