Decision Making under Uncertainty – Less Is More

In Episode #364, we walk about the difference between risk and uncertainty, and what implication does this difference have for decision making? This distinction is important in finance where pricing and investment decisions often use complex models that use assumed distribution to encapsulate risk. In reality, however, it can be argued that the future is inherently one of uncertainty and cannot be captured via a probability distribution and that a heuristic approach to decision making might be optimal. This leads to the proposition that less is more and that a heuristic approach, using less information, can produce better outcomes than a complex model dependent on numerous assumptions.