| Peter Klein |
In what should be considered a classic case of the failure to take a possibilistic approach, consider this statement by Tsuneo Futami, a nuclear engineer who was the director of Fukushima Daiichi in the late 1990s: “We can only work on precedent, and there was no precedent. When I headed the plant, the thought of a tsunami never crossed my mind.”
Futami was not alone in his thinking. Experts throughout the nuclear industry and government regulatory agencies not only failed to predict the likelihood of a giant earthquake and tsunami, but also failed to examine the vulnerabilities of Fukushima Daiichi’s design to a natural disaster of this scale. Instead, they relied on a history of successful operation as an assurance of future safety. As a result, they ignored or underestimated a number of major risks that have since doomed the plant.
In other words, decision makers do not enumerate possible outcomes, assign probabilities to each, compute expected values, and act accordingly, a la Luce and Raiffa (1957). Instead, they use heuristics, follow precedent, update priors, and so on. In Knightian terms, they use judgment.
My forthcoming book with Nicolai explores these aspects of Knightian judgment in much greater detail. Look for some excerpts to follow.