Doing Our Best: Optimization and the Management of Risk

Abstract

Tools and concepts of optimization are widespread in decision-making, design, and planning. There is a moral imperative to "do our best." Optimization underlies theories in physics and biology, and economic theories often presume that economic agents are optimizers. We argue that in decisions under uncertainty, what should be optimized is robustness rather than performance. We discuss the equity premium puzzle from financial economics, and explain that the puzzle can be resolved by using the strategy of satisficing rather than optimizing. We discuss design of critical technological infrastructure, showing that satisficing of performance requirements--rather than optimizing them--is a preferable design concept. We explore the need for disaster recovery capability and its methodological dilemma. The disparate domains--economics and engineering--illuminate different aspects of the challenge of uncertainty and of the significance of robust-satisficing.