Prediction, Judgment and Complexity: A Theory of Decision Making and Artificial Intelligence

27 Pages Posted: 29 Jan 2018 Last revised: 7 Oct 2021

See all articles by Ajay K. Agrawal

Ajay K. Agrawal

University of Toronto - Rotman School of Management; National Bureau of Economic Research (NBER)

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Avi Goldfarb

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 2018

Abstract

We interpret recent developments in the field of artificial intelligence (AI) as improvements in prediction technology. In this paper, we explore the consequences of improved prediction in decision-making. To do so, we adapt existing models of decision-making under uncertainty to account for the process of determining payoffs. We label this process of determining the payoffs ‘judgment.’ There is a risky action, whose payoff depends on the state, and a safe action with the same payoff in every state. Judgment is costly; for each potential state, it requires thought on what the payoff might be. Prediction and judgment are complements as long as judgment is not too difficult. We show that in complex environments with a large number of potential states, the effect of improvements in prediction on the importance of judgment depend a great deal on whether the improvements in prediction enable automated decision-making. We discuss the implications of improved prediction in the face of complexity for automation, contracts, and firm boundaries.

Suggested Citation

Agrawal, Ajay K. and Gans, Joshua S. and Goldfarb, Avi, Prediction, Judgment and Complexity: A Theory of Decision Making and Artificial Intelligence (January 2018). NBER Working Paper No. w24243, Available at SSRN: https://ssrn.com/abstract=3112030

Ajay K. Agrawal (Contact Author)

University of Toronto - Rotman School of Management ( email )

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Joshua S. Gans

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

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Avi Goldfarb

University of Toronto - Rotman School of Management ( email )

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Canada
416-946-8604 (Phone)
416-978-5433 (Fax)

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