CHAPTER 19 Decisions Involving Uncertainty
Every day, you roll the dice on countless decisions.
Uncertainty pervades every part of your life. You set your alarm at night, expecting it to wake you up in time to get to your first class, but there’s a chance you might sleep through it. You wake up and get dressed, picking attire appropriate for normal weather, but there’s always the risk that it turns out to be colder or hotter or wetter. You jump in the car expecting to make it to class on time, but a car accident along the way could make you late. You arrive at class expecting to be able to eat breakfast while listening to a lecture, but your professor could surprise you with a pop quiz. Then you head out to meet your friends for lunch. There’s risk there, too. You might catch a cold from one of them. Or today might be the day that you discover your friend is actually the love of your life. Risks, everywhere.
Now turn to thinking about some of the big decisions. You have to decide on your future occupation, but who knows if they’ll still be hiring app designers when you graduate? If you start your own business you’ll have to take a leap of faith, not knowing for sure how popular your products will be or whether other businesses will start competing with you. You have to decide where to live, but you don’t really know what it would be like to live in St. Louis. So, if you’re offered a great job there, you’ll face a risk that you won’t really like living there. When you contemplate marriage, you’ll wonder whether your current love will still be a good match in forty years. Eventually you’ll think about kids, but you don’t know if you’ll like being a parent or what your kids will be like. You need to save for retirement. But you don’t know what your income will be over the next several decades before you retire, how well your investments will perform, or how many years you’ll live after you retire. All that uncertainty makes it hard to know much to save.
Every day, you’re going to have to make decisions in partial ignorance of their consequences. And so our task in this chapter is to give you the tools to assess how best to make risky choices and show you strategies you can use to reduce risk.