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 incorporates the expected magnitudes and assessed base rates for CADs. Finally, we propose a decision-analytic framework for measured decision making, given ignorance. Our recommended approach explicitly recognizes decision-making costs, and thus proposes when to use quick and intuitive as opposed to more deliberative approaches to decision, or the labels Kahneman has popularized as System 1 and System 2.
Studying ignorance through literature has important implications for BCA. Given the potential for ignorance, there are two key goals for prudent decision making. First, steps should be taken to recognize when ignorance might be present. Second, efforts should be made not to respond in a suboptimal fashion when ignorance is anticipated or when a CAD springs upon us. Great literature can provide the equivalent of widespread life experience, and can help a decision maker reach both goals. At its heart, this essay represents a benefit-cost approach to dealing with ignorance. Numerous connections to BCA are made throughout.