Decision making under Uncertainty using Heuristics

I friend from Uni sent me this interesting talk about decision making given by Gerd Gigerenzer (wiki) discussing how heuristics can be very successful at decision making under uncertainty:

One example he gives is of allocating the assets in your portfolio. If you actually knew the true risks, you could use what appears to be a mathematically optimal procedure (mean-variance optimisation) to pick the best portfolio – that is, it would be mathematically optimal if you could quantify the true risks.

But, as it turns out, the heuristic of simply dividing your money equally between your 1/N asset choices – stocks, for example – usually gives a better result, because the variance in the parameter estimation needed for the mathematically optimal procedure means it’s actually a worse method under uncertainty! At least, that’s how I understood it.

Pragmatic repurposing

I originally started this blog as an attempt to discuss a topic I was interested in at the time: climate science. Well, some months have passed, and whilst I’m still interested in climate science, that’s no longer my main focus. (Actually, I started the blog partially to help my make my application for the MA in Climate and Society at Columbia University look better, which worked, but I didn’t end up going.)

This February I started a Masters of Economics back at my alma mater, Melbourne University. So I’m officially repurposing this blog to talk about my attempts to learn economics with no undergraduate background, and, since I’m a software engineer by trade, I’ll talk about code sometimes.

I love a good discussion, so please feel free to comment on anything I post!

Global and Australian carbon emissions

A friend of mine, Daniel Yeow, recently shared this incredible flowchart he found:

Flow chart of global emissions from the World Resources Institute from 2000 (click to visit)

Here’s my [nowhere near as cool!] version for Australia, built from data on the Australian government climate change website on 7th April, 2011:

(This does not include one of the emissions’ categories, ‘Land Use, Land Use Change and Forestry activities’, as it is only estimated annually, not quarterly.)

Tim Flannery’s ‘Millennium Bug’ – what he tried to say

Professor Tim Flannery caused a stir last week when he told Macquarie Radio’s Andrew Bolt that cutting emissions will not reduce world temperatures for 1000 years [partial transcript here]:

If the world as a whole cut all emissions tomorrow the average temperature of the planet is not going to drop in several hundred years, perhaps as much as a thousand years because the system is overburdened with CO2 that has to be absorbed and that only happens slowly.

Here’s a summary of what Professor Flannery meant by this remark. Later in the post I’ll talk about where these predictions come from.

  • Yes, temperatures probably will not drop for 1000 years;
  • However, due to human carbon emissions, if we do nothing, temperatures will rise by a best estimate for 4.0 degrees celsius;
  • Therefore, if no action is taken, we will be stuck with 4.0 degree celsius higher temperatures for hundreds of years.

Later in the interview, Professor Flannery tries to give some context to his remarks:

Bolt: That doesn’t seem a good deal. If we spend trillions of dollars to cut world’s emissions that we won’t notice the difference, well our great-great-great-great-great-grandchildren won’t even notice the difference.

Flannery: It will just keep getting worse if we don’t. That’s the problem.

Background: Andrew Bolt is a conservative columnist who is opposed to the mainstream consensus on climate change, and Professor Tim Flannery is the Chief Climate Commissioner selected by the current Labor government.

What does the science say about the effect of reducing emissions? According to the IPCC Fourth Assessment Report, the choice is between a 1.8 degrees celsius temperature rise – achieved by cutting carbon emissions – and a 4 degrees celsius temperature rise.

A study by NOAA (National Oceanic and Atmospheric Administration) predicts that climate change caused by human created carbon dioxide is largely irreversible for 1000 years. This is presumably what Professor Flannery was talking about.

27 March 2011: Australian carbon politics news

Here’s some of the recent news relating to the climate tax debate.

The Coalition has won a landslide victory in the NSW State Election, with a record 16% swing against Labor. The Coalition is likely to have 68 of the 93 seats in the state.

O’Farrell vows to tackle PM on carbon tax

NSW Premier-elect Barry O’Farrell today signalled turbulent waters ahead for the Gillard government, vowing to take up the fight on the proposed carbon tax.

[…]

On the carbon tax, [NSW Premier Elect] Mr O’Farrell revealed that he felt the mood of the election campaign switched on the day Ms Gillard announced the carbon tax, undercutting NSW leader Kristina Keneally’s argument that Labor would be better able to manage cost of living pressures.

Meanwhile, in Victoria:

Baillieu sticks to emission targets

[Liberal] Premier Ted Baillieu says he stands by targets to cut Victoria’s greenhouse gas emissions by a fifth over the next decade, placing him under growing pressure from business and industry ahead of his first budget.

As the debate over a carbon price intensifies in Canberra, Mr Baillieu said he was committed to the policy adopted by the Coalition and Labor last year to reduce emissions by 20 per cent beyond year 2000 levels by 2020.

[…]

Mr Baillieu has asked the Commonwealth to provide further details of its carbon scheme – namely the impact on Victorian jobs, household energy bills, and compensation – so the government could work on further initiatives.

In Canberra, the battle continues:

Abbott calls for new election on carbon tax

Opposition Leader Tony Abbott has called for a fresh election to test the federal government’s plan for a carbon tax.

Mr Abbott today addressed an anti-carbon tax rally outside Parliament House in Canberra, which organisers say attracted 3000 protesters.

The Liberal leader told the crowd that Prime Minister Julia Gillard did not have a mandate for the carbon tax, which the government wants to introduce on July 1, 2012.

This piece from Prime Minister Gillard appeared:

Reject the climate extremists

Small groups with loud voices shouldn’t be allowed to derail the action we need to take.

As the world moves to a lower carbon future, now is the right time for Australia to decide how we secure a clean energy future.

This is an important policy debate that should not be distracted by extreme views. People should have their say but their contribution should be judged by its quality, not its volume. Australia must reject the extremes of the debate, no matter from where on the political spectrum they emerge.

She also gave a speech to the Don Dunstan Foundation on the topic (it’s a bit old – March 16 – but it succinctly describes her position):

Speech to the Don Dunstan Foundation

Australians of the future will look back on [opposition leader Tony] Abbott’s campaign with pity and shame. The pity and shame posterity reserves for leaders who miss the wave of history and misjudge the big calls […]

We will cut carbon pollution. We will not leave our nation stranded by history. We will not live at the expense of future generations. We will get this call right and get this job done: For our nation. For our people. For our future.