If recent research (pdf) has to be believed, then the problem with conventional economics is that it tries to model how individuals choose from a range of options. But how do they know what these options are? Many feasible options might not even occur to them. Customers who don’t know of alternative products get ripped off; potential rivals who don’t know the technology or market don’t enter the industry, etc.
The worst part is that we know not that we know not. Decision makers are often unaware that they are choosing in ignorance.
The paper makes some interesting hypothesis:
- Ignorance often goes unrecognized
- Even when we worry, plan, and prepare for the future while explicitly recognizing our ignorance, Consequential Amazing Development, CADs, will occur
Investors tend to make significant errors because much of their training prepares them only for the world of risk and uncertainty, with probabilities that can be estimated. But real life involves a series of amazements, not just contemplated events. Also, most of these are singular occurrences, making it difficult to learn from past mistakes.
Worth a read.