UNCERTAINTY AND POLICYMAKING: Evidence from COP21

03 Mar 2020

Policymakers, like most people, dislike deep uncertainty: they prefer to be in situations where they know the probabilities of given events or actions. This “attitude” towards deep uncertainty is not necessarily due to a mistake, although it is harder to deal with more complex uncertain situations, but can result from basic human preferences.

These are the conclusions of a new study by Loïc Berger and Valentina Bosetti published in the February 2020 issue of The Economic Journal. Their research investigates the behaviour of climate negotiators at the Paris conference COP21. In a field experiment, the authors interviewed 80 policymakers, originating from 49 countries, who were directly involved in climate negotiations. Replicating the study in a laboratory with university students, they were then able to assess whether the findings apply to/ or varied across groups of individuals, cultures and contexts.

Attitudes to deep uncertainty (or ambiguity) have been, and continue to be, one of the most intensively experimentally investigated phenomena in economics.

Existing studies replicating the famous Ellsberg (1961) paradox (see Figure 1) have typically confirmed the conjecture of widespread ambiguity aversion (i.e. a preference for “risk”, where probabilities are known, over “ambiguity” where they are not). Yet such preferences are considered as inconsistent with the standard model of choice used in economics (for example, assuming that red is the winning color, one could note that betting on ambiguity should be either equivalent, or more desirable if you think that the majority of the balls in the second urn are red).

Risk

 

Ambiguity

 

Figure 1: Ellsberg experiment. You confront two urns containing red and black balls, from one of which a ball will be drawn at random. You can choose the colour and the urn on which to bet. A correct bet makes you win €100. You have the following information: the first urn contains 50 red and 50 black balls; the second urn contains 100 red and black balls, but in a ratio entirely unknown to you; there may be from 0 to 100 red balls. On which urn do you prefer to bet?

 

The question of whether the driving force of ambiguity aversion corresponds to irrational behaviour or a rational response to situations of deep uncertainty has been the topic of heated debate among scholars.  And it still remains an open question.

Moreover, while most studies on ambiguity have focused on students, relatively little is known about the behavioural traits and preferences characterizing the elites who actually make policy decisions. Even though it has long been argued that the behavioural traits of policymakers do not matter much at the time of making decisions –because of the broader interests these individuals are supposed to represent– in practice, these elites’ preferences may ultimately affect policy choices and, therefore, have an impact on entire social groups. It is therefore crucial to understand their behavioural traits and preferences.

“Given that the design of policy strategies in the context of climate change is strongly affected by the presence of ambiguity, we specifically focus on climate policymakers,” says Prof. Bosetti. “In this context, a better understanding of what drives people’s preferences also bears important implications, as neglecting ambiguity attitudes has been shown to lead to an underestimation of the benefits of more stringent climate policies”.

Through their study, the authors were able to disentangle preferences for objective or subjective probabilities in association with individuals’ ambiguity attitudes. Their results reveal that policymakers are “ambiguity averse” and that this attitude is not necessarily due to an irrational behaviour (i.e. treating differently a situation of risk and compound risk, see Figure 2, left), but rather to intrinsic preferences over unknown probabilities (i.e. treating differently situations of risk and model uncertainty, see Figure 2, right).

Compound Risk

 

Model Uncertainty

 

Figure 2: Left (Compound risk): the number of red and black balls in the urn is determined by flipping a fair coin in the air. If it is heads, all the balls are black, if it is tails, all the balls are red. Right (Model uncertainty):  the number of red, black and the total number of balls in the urn are unknown, but information is provided by two “experts”, each giving her own assessment of the composition of the urn.
 
Exploiting the richness of their data, the authors were moreover able to show that other variables such as the country origin or the level of education of the subjects affect their ability to reduce compound risk while leaving their ambiguity attitudes unchanged.
 
“These results shed light on the role ambiguity models can play in informing policymaking.” concludes Prof. Berger. “In particular, our results have important implications for the way attitude towards ambiguity is perceived and treated in economic models. They leave room for considering ambiguity aversion as a rational way to deal with uncertainty and strengthen the potential for ambiguity models to provide normative policy guidance.”
 
 

Are Policymakers Ambiguity Averse? by Loïc Berger and Valentina Bosetti is published in the February 2020 issue of The Economic Journal.

Loïc Berger

Research Professor | CNRS, IESEG School of Management | l.berger@ieseg.fr

Valentina Bosetti

Full Professor | Bocconi University | valentina.bosetti@unibocconi.it