An Analysis of the Dismal Theorem

William D. Nordhaus ()

No 1686, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: In a series of papers, Martin Weitzman has proposed a Dismal Theorem. The general idea is that, under limited conditions concerning the structure of uncertainty and preferences, society has an indefinitely large expected loss from high-consequence, low-probability events. Under such conditions, standard economic analysis cannot be applied. The present study is intended to put the Dismal Theorem in context and examine the range of its applicability, with an application to catastrophic climate change. I conclude that Weitzman makes an important point about selection of distributions in the analysis of decision-making under uncertainty. However, the conditions necessary for the Dismal Theorem to hold are limited and do not apply to a wide range of potential uncertain scenarios.

Keywords: Dismal theorem; Uncertainty; Climate change; Catastrophes (search for similar items in EconPapers)
JEL-codes: O13 D81 Q5 H43 (search for similar items in EconPapers)
Date: 2009-01

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Working Paper: An Analysis of the Dismal Theorem (2009)
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