A 'Stern' Look at Uncertainty, Novelty, and Surprise

Via Greg Mankiw: "Economists Joe Stiglitz, Nicholas Stern, and Martin Weitzman [PDF] have new pieces on global warming. The most interesting (as well as the most technically demanding) is the one by Weitzman. His conclusion: 'The Stern Review may well be right for the wrong reasons.'" I agree. In particular, I agree with Weitzman's conclusions. Here's a condensation:

… If the conclusion from the last section — that what to do about global warming depends greatly on the imposed interest rate — is seen as disappointing, then a second conclusion is likely to seem downright unnerving. …[E]ven if we had an infinite time series of past observations, they are of limited relevance in an evolving world where the environment is changing and the past never fully repeats itself. With this interpretation of the puzzles, people are willing to pay a lot for relatively safe stores of value that might represent a bit of insurance against out-of-sample or newly-evolved rare disasters.

There is little doubt that the worst-case scenarios of global warming are genuinely frightening. The Stern Review goes over several of these unlikely disasters associated with abrupt large-scale irreversible changes in the climate system: sudden collapse of the Greenland and West Antarctica ice sheets, weakening or even reversal of thermohaline circulations like the Gulf Stream, runaway amplification of global warming due to the many potential reinforcing feedbacks…. More gradual but still very serious are elevated sea levels, drowned coastlines, extreme weather patterns, flood risks, catastrophic tropical-crop failures, new humidity-nourished contagious diseases — and the list goes on and on.

Translated into the language of the simple model used here, such rare disasters are far out in the left tail of possible low, or even negative, or even possibly very negative values of …. The net result is thicker left tails for growth rates under dynamically-evolving global climate change than we are accustomed to dealing with in our much-more-familiar dynamic-stochastic-general-equilibrium macro models, which in practice are based upon the stationary thin-tailed stochastic processes that we use to model a rational expectations equilibrium whose structure is fully known. …

… [I]n lumping together objective and subjective uncertainties and thereby obscuring their distinction — to the extent that a graduate student today hardly knows, or even cares, what kinds of probabilities are legitimate to plug into a rational expectations equilibrium and what kinds of probabilities are illegitimate for this purpose — I think that contemporary economic practise goes too far and leads to a mindset that all-too-easily identifies subjective probabilities with sample frequencies from past data. …

… The upshot of this uncertainty about uncertainties is that [we are dealing with thick left tails] whose exact thickness depends not only on how bad a catastrophe global warming might induce and with what probability, but also on how imprecise are our probability estimates of the probabilities of those bad catastrophes. …

… [T]o ignore or suppress the significance of rare tail disasters in an application of expected utility theory like cost-benefit analysis of climate change, where there is so obviously limited data and limited information about extremes, is to ignore or suppress what theory is telling us is potentially the most important part of the analysis. … The take-away message here is that the burden of proof in the economics of climate change is upon whomever wants to model optimal-expected-utility growth under endogenous greenhouse warming without uncertainty tending to matter more than risk. Such a center-or-the-distribution modeler needs to explain why the necessarily-thickened tail representing rare disasters under uncertain structure does not play a critical role in the analysis. …

… I think that rather than trying to go through the back door … it is much better to deal directly through the front door with the legitimate issue that there is a chance, whose subjective probability is small but diffuse (thereby resulting in a dangerously-thickened left tail of growth rates), that global warming may cause disastrous environmental changes. If one accepts this assessment, then many hard questions need to be asked [including:] What are early-warning signs of impending environmental disasters like melting ice sheets or thermohaline inversions? How much would it cost to put sensors in place that might detect early-warning signals of impending climatic catastrophes? How early might the warning be before the full effects are felt? Would last-ditch emergency measures help to ward off disaster by reversing the worst consequences of global warming in time? … Could such last-ditch measures be made reversible by building in decay mechanisms (while we then use the new information to really really undertake draconian measures to cut greenhouse gas emissions drastically)? Can the public accept the politically-incorrect idea that in the extremely unlikely event of an extraordinary disaster it might conceivably be a good idea to purposely tinker with spaceship Earth yet further? (This time our purposeful environmental tinkering would be to offset the unintended bad consequences or our previous tinkering with the planet via an industrial revolution that turned out to have delivered near to medium-term prosperity at the long-term cost of having burned so much fossil fuel that with hindsight we inadvertently created an environmental catastrophe.) …

… Until we start seriously posing and trying to answer tough questions about rare global-warming catastrophes, we will not make real progress in dealing constructively with the night-mare scenarios and we will continue to cope with them inadequately by trying to shoehorn disaster policy into an either-or response category where it won't fit. …

… To its enormous credit the [Stern] Review supports very strongly the politically-unpalatable idea, which no politician anywhere wants to hear, that the world needs desperately to start confronting the reality that burning carbon is expensive because it has a significant externality cost that must be taken into account. … As I have made clear here, a generous interpretation of its biased economics also credits the Stern Review as being the only full-fledged analysis of global warming that intuits the significance of rare left-tail disaster for cost-benefit calculations, even if this intuition remains heuristic and does not formally enter the analysis through the front door. …

In more simple terms, some time ago I reduced Weitzman's uncertaintly conclusion to, "Surprise and uncertainty are too profound to be reduced to futuristic numbers," as one of my Top Ten Reasons Why Cost Benefit Analysis Fails in Public Choice Settings.

See also Kerry Emanuel's Phaeton’s Reins: The human hand in climate change, Boston Review, January/February 2007

Comments

[sushil_yadav]

The link between Mind and Social / Environmental-Issues.

The fast-paced, consumerist lifestyle of Industrial Society is causing exponential rise in psychological problems besides destroying the environment. All issues are interlinked. Our Minds cannot be peaceful when attention-spans are down to nanoseconds, microseconds and milliseconds. Our Minds cannot be peaceful if we destroy Nature.

Industrial Society Destroys Mind and Environment.

Subject : In a fast society slow emotions become extinct.
Subject : A thinking mind cannot feel.
Subject : Scientific/ Industrial/ Financial thinking destroys the planet.

Emotion is what we experience during gaps in our thinking.

If there are no gaps there is no emotion.

Today people are thinking all the time and are mistaking thought (words/ language) for emotion.

When society switches-over from physical work (agriculture) to mental work (scientific/ industrial/ financial/ fast visuals/ fast words ) the speed of thinking keeps on accelerating and the gaps between thinking go on decreasing.

There comes a time when there are almost no gaps.

People become incapable of experiencing/ tolerating gaps.

Emotion ends.

Man becomes machine.

A society that speeds up mentally experiences every mental slowing-down as Depression / Anxiety.

A ( travelling )society that speeds up physically experiences every physical slowing-down as Depression / Anxiety.

A society that entertains itself daily experiences every non-entertaining moment as Depression / Anxiety.

FAST VISUALS /WORDS MAKE SLOW EMOTIONS EXTINCT.

SCIENTIFIC /INDUSTRIAL /FINANCIAL THINKING DESTROYS EMOTIONAL CIRCUITS.

A FAST (LARGE) SOCIETY CANNOT FEEL PAIN / REMORSE / EMPATHY.

A FAST (LARGE) SOCIETY WILL ALWAYS BE CRUEL TO ANIMALS/ TREES/ AIR/ WATER/ LAND AND TO ITSELF.

To read the complete article please follow either of these links :

http://www.planetsave.com/ps_mambo/index.php?option=com_simpleboard&Itemid=75&func=view&id=68&catid=6

http://www.earthnewswire.com/index.php?option=com_forum&Itemid=89&page=viewtopic&t=11

sushil_yadav

[Dave Iverson]

SY (from the hyperlinked larger-work) : "Time is running out for this planet."

DI: No. Time may be running out for Western Civilization. But the Planet will do fine. Read Kurt Vonnegut, Jr.s GALAPAGOS, for example. BTW: Stephen Jay Gould once said that Vonnegut's book was the best study in Contingency Theory he'd ever seen. Oh, I think it was Gandhi who once remarked that Western Civilization would be a good idea. The point: there is nothing civilized about it.

SY: "Regarding Industrialization there is an important point to be noted. Modern Industrial Society has existed for 100 years - 200 years - 300 years. When we compare this period with the total duration for which human society has existed on earth this period is so short - so small that it almost does'nt exist. It is almost zero.

"Material things don't bring peace and happiness. Today billions of people have got things which even Kings did not have in the past. Car, computer, television, fridge, telephone - no King ever had these things. But people are still restless and unhappy.

"Industrial Society is consuming psychiatric drugs/ sleeping pills by tonnes and tonnes.

"A very large percentage of the population is surviving on precription drugs, illegal drugs, alcohol and cigarettes.

"One-third of the population has become fat like elephants.

"People talk about increase in lifespan. What is the use of increased lifespan if people have to resort to Drugs, Alcohol and Cigarettes to pull through life. And just wait a few more years - the average lifespan will soon become zero - human life will cease to exist on earth."

"We would need several planets [earths] to sustain the present lifestyle. Consumerist-Lifestyle is just not sustainable. If we do not immediately return to living a very simple and frugal life then very soon there will be no human life on earth."

DI: Voluntary Simplicity, Deep Ecology, and others work toward the same ends, but with a bit less hostility than I read into your larger work. Cities don't have to go. Thinking doesn't have to stop. etc. But ALL much be rethought. Follow the sidebar to Jim Kuntsler's CLUSTERFUCK NATION for more. Here is a link: http://jameshowardkunstler.typepad.com/clusterfuck_nation/

[Steven Earl Salmony, Ph.D., M.P.A.]

Dear Sushil and Dave,

May I fully agree with the idea that thinking does NOT need to stop. Coherence of mind, clarity of vision and simple courage, based upon the advancements of science, could be required of us now.

Outworn preternatural beliefs about what it means to be human, the placement of humankind within the natural order of living things, and the requirements of practical reality in a physical world need to be replaced by good scientific evidence.

With good science as a guide, there are no challenges that the humanity community cannot address and overcome.

Thankfully,

Steve

[chris miller]

Uncertainty about just how uncertain the risk is. Sure.

I don't understand how the discount rate matters. Pleasure/addiction now vs no generations later doesn't compute for the future generations. If you are going to talk about discount rate and risk, you are shutting out entirely the future generations. Given that I'm 52 years old, anything you promise me in 50 years is of no value. Killing my children works best.

And that is exactly what our system is doing. What we need is not a discussion of discounting, but a mechanism to bring the seventh generation to that table with real standing.

cfm

[Dave Iverson]

Chris: "What we need is not a discussion of discounting, but a mechanism to bring the seventh generation to that table with real standing."

Yes.. And that is precisely Weitzman's 'take home message' : quit dealing with this stuff via the "back door". It is also the take home message from many others, including me.

[HealOurWaters]

I love it when the environment and economics intersect!

There is a coalition coming out with an economic report in a couple weeks showing that cleaning up the Great Lakes will turn out to be CHEAPER in the long-term. Take a look at the site:
http://www.healthylakes.org/