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So Many Bad Decisions, So Little Time

June 9, 2014 in Economics

By Richard W. Rahn

Richard W. Rahn

Would you have traded five terrorists for Sgt. Bowe Bergdahl? The decision may have been wrong or right, but what is striking is that President Obama seems to have made this decision, and all too many others, in an ad hoc way, rather than using decision theory.

Decision theory is an orderly way of thinking and choosing among alternatives when there is a number of variables for which the probabilities of each may or may not be known to the decision-maker. A related concept is that of “regret,” which is the difference between the actual payoff and the best one. In the Bergdahl case, as the president has acknowledged, there is a risk that some of the released terrorists may go back to their old ways and kill Americans. The president put a low probability on that outcome. Yet some CIA officers put a high probability on that outcome. How much “regret” evaluation did the president and the CIA do in coming up with their conflicting judgments?

Both individuals and government leaders make many bad decisions because they let emotion or ideology override reason and empirical evidence.”

Politicians and criminals both have a tendency to underestimate the probability of getting caught in bad acts. Is it because few studied decision theory or because there is a certain recklessness in the nature of those who follow such pursuits? We know from empirical evidence that very visible politicians have a high chance of getting caught with their pants down (so to speak) — think of Bill Clinton, John Edwards and Eliot Spitzer. President Clinton managed to get himself impeached, indirectly, over an act of momentary pleasure — and, even though a smart guy, he underestimated the probability of being caught.

Almost everything we do has costs and benefits. Getting a college education has costs before the benefits, while drinking too much at a party often appears to have benefits, but the costs come due the next morning. There is a natural human tendency to overestimate the benefits of various anticipated actions and to underestimate the costs. This applies to government regulators. The president tells us how concerned he is about global warming, yet the measures that his own administration has implemented and is trying to impose will cost hundreds of billions of dollars, if not trillions, and by its own estimates, will only reduce temperatures by two-tenths of one degree in 100 …read more

Source: OP-EDS

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