The visible hand in economics

The climate change sceptics have it right!

Posted on: April 3, 2008

Many climate change sceptics argue that the IPCC’s predictions are highly uncertain. Over at Vox, Paul Klemperer suggests that this should make us more worried, rather than reassuring us.

…[If] the models merely underestimated the uncertainty, the range of plausible outcomes is now greater, so… defences would need to be higher for us to feel safe.

Klemperer is implicitly relying on people’s risk aversion to claim that the increase in uncertainty makes us worse off. Standard economic theory is on his side here, but experimental work has shown that people are actually risk seeking when it comes to losses. Most people would rather gamble on a loss if there’s some possibility of averting it than take a small, certain penalty. That implies that the increase in uncertainty over the costs of climate change might actually make people feel better about it! Maybe the sceptics are pressing the right buttons after all.

4 Responses to "The climate change sceptics have it right!"

How do they reconcile the experimental result with the fact that people generally buy insurance?

Could you please exactly make a reference to the experimental work you are thinking of in this case?
I bet that the size of the loss matter, so I am not sure of that work you are referring to applies to the climate change discussion. Also, as we all know, it depends on the type of experiment/how it is setup etc.: I am very skeptical in believing the outcome of an experiment carried out on 100 undergraduate kids sitting in a lab so that they can to get 10 bucks an hour out of it…

@ecpzb

Sorry, I rushed this off late and was too lazy to link it. I’m referring to the work on decisions under uncertainty by Kahneman and Tversky that lead to the development of prospect theory. I’ve now included a link to the original paper that they published in the post.

@CPW

My understanding of prospect theory isn’t particularly thorough so I’m going to do some more reading before I say anything silly 🙂 I’ll try to do a post on it by the end of the weekend cos the more I read, the more interesting it sounds.

[…] sense of insurance 7 04 2008 I recently mentioned that prospect theory tells us that most people are risk seeking in losses. CPW commented […]

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