Intertemporal Decision Making Under Uncertainty: Experiments with Environmental Applications

College Of William And Mary, Williamsburg VA

Investigators

Abstract

Environmental decision-makers are faced with uncertainty from many different sources. First, we cannot be certain of the effect human decisions will have on the environment. Second, we do not know how ecological changes will affect human welfare because the valuation of environmental changes is uncertain. Finally, decision-makers also face regulatory uncertainty. The intertemporal nature of environmental decisions adds another layer of complexity. Choices are made today, but the consequences of those choices are not known until some time in the future. However, many models of environmental decision-making incorporate assumptions about intertemporal choice under uncertainty that may not represent the way individuals truly behave. One particularly problematic assumption is that all uncertainty can be modeled as risk, that is situations where the possible outcomes are known and the likelihood of each outcome can be estimated. In reality, environmental issues often involve ambiguity rather risk, that is situations where all of the possible outcomes are not known, or where the probability of each outcome cannot be estimated. Because it is particularly difficult to observe and measure uncertainty faced by environmental decision-makers, individual behavior cannot easily be studied using traditional empirical methods. Hence, we will use laboratory experiments to analyze how the nature of uncertainty, that is whether there is risk or ambiguity, affects intertemporal decision-making. A better understanding of individual behavior in the presence of intertemporal uncertainty will help us build more realistic models of environmental decision-making so that we can better design policies to protect human health and the environment. The results of these experiments will be used to develop a research program to analyze intertemporal decision-making in more complex environmental settings. Moreover, this research will produce valuable insights into human behavior that can be applied in all situations where there is intertemporal uncertainty.