Flexibility, learning, and irreversibility in environmental decisions: A bayesian approach

Abstract

The Bayes decision is characterized and studied for a two-period decision problem involving a proposed resource development project. It is assumed that development is irreversible and that expectations about benefits and costs during the second period vary with experiences resulting from the first-period action. The amount and types of learning achieved depend upon the particular action taken during the first period. Flexible sequential decision procedures are compared with fixed once-and-for-all decisions. It is shown that under this specification, optimal development decisions are not necessarily more conservative when a sequential procedure is used. The possibility of reneging on a fixed decision is formally specified and studied.