The Uncertainty Effect: Why Ignorance is Hardly Bliss

Which would you prefer: waiting through a red light indicating 5 minutes till it turns green or waiting at a red light for three minutes with no indication of when it’ll change?

I’m willing to bet most people would choose the first option. The thought of a nerve-racking wait at a red light with no idea when it’ll change appeals to very few people. In fact, some might beat the red light after 90 seconds. Such time uncertainty’s also why prisoners would painstakingly draw lines on their cell walls in an attempt to count how long they had been kept captive. The ignorance of time could drive some crazy. Clearly, the ambiguousness of time-much like the ambiguousness of the future-significantly affects the decisions we make: in mundane and noteworthy ways.

Phrases warning against scenarios of uncertainty are littered in our literature. “Better the devil you know than the devil you don’t know” or “a bird in the hand is worth two in the bush” are two of several warnings to eschew falling into circumstances with uncertainty. However, as much as we try to establish certainty in our lives, the culmination of random probabilities that constitutes life ironically makes it certain that we will face uncertainty.

Game theory scenarios only exist when the factor of ‘uncertainty’ is involved and information asymmetry results from the uncertainty of one of the partners in a transaction. On a less academic side, uncertainty affects our sense of entertainment. Scary movies are mostly only scary when one is ignorant of what horrific scene pops up next. Also, jokes lose their comedic flavor the more one is certain of the punch line. It’s why we quickly begin to dislike individuals who constantly repeat jokes. It’s why buying gifts are impossibly annoying; especially when one lacks vital information on the tastes of the recipient. Probably explains why coolers are the major Nigerian wedding gifts.

So, uncertainty does some cool and not so cool things. That’s it? No. Uncertainty has far higher reaching effects than these simple pedestrian consequences. Actually, its consequences might be important to unlocking some issues faced by Development Economists, as well as influencing the moral decisions of individuals.

With uncertainty, it’s easy to understand why some poor parents would rather have their children work in the farm or hawk on the streets than let them have an education-even when its free. Investment on education takes several years to show benefit, and that comes with a whole bunch of risk these parents might not be willing to take.

Likewise, a small-scale farmer is less likely to risk a loan for fertilizers when he’s uncertain of next season’s weather. (Sadly, rising rate of global warming ensures that unpredictable seasons will get worse).

Uncertainty also explains the lack of a savings culture for the poor. Jaime Ruiz-Tagle (2011) finds that for a given level of uncertainty, there is a wealth threshold below which the individual gets trapped because of the uncertainty, without being able to accumulate wealth, as in a “poverty trap”.

Still on the topic of finance management, uncertainty also affects credit access for the poor. As Banerjee and Duflo in Poor Economics observe; the interest rates charged by informal sources tend to be higher for the poor than for the less poor. Monitoring borrowers takes effort, which takes time, and time is money. Given that these expenses does not scale with loan size, “the smaller the loan, the larger the monitoring and screening costs will be as a fraction of loan size, and because these costs have to be covered by the interest collected, the higher the interest rate will be.” In simpler words, the poor get screwed cause there’s less certainty that they’ll pay back and cause it cost more to make sure they pay back.

When it comes to morality, uncertainty has its effects. As much as many of us might disagree, uncertainty keeps a lot of people religiously active. When one-who believes in the afterlife-is uncertain of his/her afterlife destination, one’s more likely to keep to the religious tenets in a bid to increase certainty of heaven rather than hell.

Ironically, uncertainty also plays a role in moral depravation of public officers, who are more likely to steal when the future isn’t assured. They simply consider the tumultuous life after Government service, realize the uncertainty of a meager pension or a new job and decide that corruption might be a good way to secure their post-Government job future. After all, “why not make hay while the sun shines?” they’d ask.

And what about the impoverished Anambra indigenes who sold their vote for N1000 or a carton of Indomie? They were simply hedging their bets with the certainty of the food than the uncertainty of future political promises. Moreover, they’re doing it based on their recollection of past broken promises.

All these examples are situations of people who time discount when faced with the ambiguousness of the future. Like them, many of us make decision similarly when faced with uncertainty. We develop a high time preference i.e a focus on present well-being when faced with an uncertain future because, as humans, we are risk-averse. We hate losing more than we love winning and because of this, we prefer to make decisions with the least risk. And most times, those less risky decisions are only available in the present.

Unfortunately, these decisions might be rationally sound in the present, but potentially wrong in the future; especially when one considers the latent benefits of taking the risky choice i.e. educated and employed children, higher crop yield for the farmer, greater savings for the poor, lesser corruption and better leaders for the electorate.

Just like the traffic light with a countdown prevents us from making the stupid decision to break the law, certainty-obviously- gives us the tools to make better decisions. For policy makers out there, it isn’t enough to predict what the poor need now: consider their future needs in order to understand what policies are most effective. Also, create more accurate future predictors that equip people-especially the poor- with enough information to make better decisions. We might not know the future, but at least we can shape and predict it.