We make decisions under uncertainty whenever we treat illness, make an investment, plan for retirement, drive home from work, or buy a bagel. Some of these decisions involve serious outcomes that will have big impacts on our lives if we choose poorly. In others the worst case scenario for a poor decision is trivial.
It stands to reason that the resources—time, money, energy, thought—we invest into making a decision should be proportional to its importance. It is as irrational to deliberate for more than a few seconds about the optimal place to sit on the bus as it is to get married on the strength of a perfect first date. Our sense of the importance of our decisions is captured in what economists call the expected value of our actions.
The mistakes above and below the line deserve some specific analyses and strategies. The triangle on the bottom right represents all the cases where we invest more resources into making a decision than its relative importance warrants. You spend twenty minutes agonizing over which frozen yogurt flavor to get; you go buy bug spray and spend extra time applying it and warning everyone about the dangers of Zika virus; you avoid a potentially fun camping trip because you’re worried about serial killers.
Economists define the value of a particular outcome as the probability of that outcome multiplied by its utility. Sometimes the outcomes we waste energy worrying about are unimportant because their utility is very low: You would have been just as happy with the chocolate velvet cake frozen yogurt as you would have been with the strawberry tart, but you thought about it, talked about it, and dedicated time and mental resources to it as if the wrong decision would be dire. You acted like your efforts to decide would make a real difference to your future self. Alternatively, the outcomes can have low importance because their probability is vanishingly small: the combined odds of getting the Zika virus, being pregnant, and having birth defects are astronomically low.
With every decision we make in life comes a decision about how to decide, one we often make badly without realizing it. Learning to apportion our decision-making resources to the problems that really matter is a big step toward getting more of them right.
Department of Philosophy