Decision Making Under Uncertainty. Paper Presented on IIASA's 20th Anniversary

Krasovskii, N.N., Feichtinger, G., Hofer, E.P., & Ermoliev, Y.M. (1994). Decision Making Under Uncertainty. Paper Presented on IIASA's 20th Anniversary. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-94-006

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Abstract

IIASA celebrated its twentieth anniversary on May 12-13 with its fourth general conference, IIASA '92: An International Conference on the Challenges to Systems Analysis in the Nineties and Beyond. The conference focused on the relations between environment and development and on studies that integrate the methods and findings of several disciplines. The role of systems analysis, a method especially suited to taking account of the linkages between phenomena and of the hierarchical organization of the natural and social world, was also assessed, taking account of the implications this has for IIASA's research approach and activities.

This paper is one of six IIASA Collaborative Papers published as part of the report on the conference, an earlier instalment of which was Science and Sustainability, published in 1992.

When policy advisors come to appreciate that real uncertainty will affect the application of their recommendations they usually respond in one of two ways: (1) They may say that there are many possibilities, and then prepare a scenario for each; knowing the options advances the policy maker a little but his real decision making is not advanced, and on that he is left without advice. (2) They say that the uncertainties are so great that action had better be delayed until more is known; this recommendation for inaction is often very attractive to a policymaker, especially if getting more knowledge will mean waiting to enact some unpopular measure until a successor takes over the office.

Since there are no situations in which data is complete and exact, what can be done? That question is specially relevant to environmental decisions. At least policy can avoid what is called the prisoners' dilemma, where two people making rational decisions independently, i.e., each not knowing what the other will decide, can put themselves into a worse condition than if they make certain decisions that from the individual viewpoint are irrational, and much worse than if they participate in a collective decision. French indicative planning, now less favored than it was, aims to spread knowledge to each enterprise in an industry of what the competitors are intending, in the hope that that that will mean better decisions all around. A special case is what economists call externality, where a piece of common property is exploited by independent individuals, solitary choosers. One of the questions is whether the prisoner's dilemma and externalities can be handled by dissemination of information alone, or whether some form of compulsion is required, for example compulsion in the form of required pollution permits. These would give those who choose to buy them a marketable permission to exploit, and it can be shown that the outcome is economically superior to any instruction from above.

Professor Krasovskii provides some models, simple in form but sophisticated in substance, that show the nature of the problem of uncertainty in decision making, and how at least in theory it can he dealt with.

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