The end is in sight! Friday was the last visit to a department by the RURS team - still out on east campus in the Department of Ag Economics (also known as the building with the ice cream store!).
One thing that was clear, was that risk and uncertainty are concepts about future outcomes. Participants quickly made the distinction between risk and uncertainty with risk being probabilistic, while uncertainty describes a situation without calculable probabilities. Later, this distinction was broken down to some extent when a participant pointed out that uncertainty could be quantified with subjective probability. Another participant added that using subjective probability for uncertainty is a matter of analytical tractability - it makes the mathematical analysis possible.
Economics focuses on the study of marginal conditions, so they are always dealing with risk and uncertainty. One participant suggested that critical thresholds arise when these marginal approaches fail because of non-differentiability in the functions. Another threshold arises because of one's tolerance for risk; a determinant of what makes a threshold of that type critical is the stakes involved.
Another aspect of critical thresholds that generated some discussion was the idea that they are irreversible in some sense. Some actions permanently close off alternatives, and in neo-classical economics this can be captured with option value approaches. This can put a value on acquiring improved information, if by waiting better information will become available enabling a better choice to be made.
There was broad agreement that human beings individually are not behaving rationally - they may not have consistent risk preferences, or be able to use probability information to make decisions. For example, many highly educated and well paid people buy "product protection plans" from retailers for items that they can easily afford to replace.
Another idea was that risk can have a utility - entrepreneurs are those who can exploit that. The irony of tenured faculty making this observation was not lost on the participants.
Institutions, meaning a set of values, norms, ethics and traditions, evolve to deal with uncertainty. For example, the creation of water districts to deal with variability in water availability for farming.
One assertion of economics is that markets work better in the presence of information. However, information is not free. One participant commented that she is unwilling to drive across town to check the price of milk. In addition, one participant noted that order that information is presented, the way it is presented, and the amount of information affects the decisions that economic agents reach.
Complexity of information - five different areas of risk for a farmer, and each has a variety of instruments to deal with it. Making the best joint decision is far too complex, so individual farmers make the decisions independently. One participant suggested that a way to deal with such complexity is to manage very conservatively; farmers who can keep debt to asset ratios low have lower consequences of making an incorrect decision.
Another good example of how individual outcomes can vary from population level predictions is the observation that a farmer's career consists of 30-40 crops. An optimal decision based on theoretical probability distributions may never produce the right decision for a single farmer.
And finally, economists did use the risk of driving as an example of a bad outcome, and in particular people are more willing to take risks when they have a greater sense of control (driving vs. cancer).