Benefit-cost analysis (BCA), a discipline best known for guiding policy choices, can also guide personal decisions. In either application, traditional BCA tallies benefits and costs using market values or willingness to pay. When future outcomes are uncertain, as they are across a wide array of situations, BCA must call as well on the methods of decision analysis. Thus, von Neumann–Morgenstern utilities, subjective probabilities, and sequential decision strategies are brought into play. Traditional decision analysis distinguishes between risk and uncertainty. With risk, the probabilities of possible outcomes are known; with uncertainty, those outcomes are known, but not their probabilities. We introduce the concept of ignorance: a third, less tractable category. With ignorance, even the possible outcomes of decisions cannot be identified. Ignorance takes particular importance when high payoffs are associated with these unidentified outcomes, as is often the case. We identify such outcomes as consequential amazing developments (CADs). In the policy realm, the 2008 financial meltdown or the Arab Spring would represent a CAD. For an individual, a CAD might be that one’s secure tenured position had been inexplicably terminated, or that one’s trusted business partner had long been shuttling corporate secrets to a competitor. We distinguish between unrecognized and recognized ignorance. In the latter category, we identify specific cognitive biases that impair decision making.
Devjani, Roy, and Richard Zeckhauser. "Grappling with Ignorance: Frameworks from Decision Theory, Lessons from Literature." Journal of Benefit-Cost Analysis 6.1 (Spring 2015): 33-65.