Justification Norms Under Uncertainty: A Preliminary Inquiry

Abstract:     
People making decisions under uncertainty may need to justify those decisions to their reputational community. This Essay considers when and how the potential need to justify might lead a decision-maker to employ a methodology better suited to yielding a justifiable choice that may not be the best choice. When a decision involves uncertainty, the possible outcomes and probabilities are not known. A broad consensus about a methodology that produces a good decision often may not exist. But norms will often arise as to acceptable methodologies - that is, methodologies that will be accepted as justifiable if justification is needed. The norms instantiate considerable stickiness - after all, the best way to demonstrate that something is (typically) “done” is to show that relevant others “do it.” This Essay identifies a particular pathology associated with the practice of favoring a justifiable decision over a “good” one, and argues that this pathology can have significant negative consequences. The main example discussed is the volume of subprime securities purchased. Other examples include the process by which CEOs are selected, and decisions regarding contract terms in complex business contracts.

Number of Pages in PDF File: 29

Keywords: justification, norms, herding, uncertainty, risk

JEL Classification: D70, D81, K20, M51

Accepted Paper Series