2.5.4.2. The Value of Information
A straightforward method of judging the value of information in an uncertain
environment has been developed and applied (see Manne and Richels, 1992, for
an early and careful description). The idea is simply to compute the expected
cost of uncertainty with and without the information and compare the outcomes.
For example, it might be that improved information about the range of uncertainty
might change the mean and the variance of associated costs. If the researcher
were interested only in the resulting change in costs, however, the value of
information would simply be the difference between expected cost with and without
the new information, and only the mean would matter. If the same researcher
wanted to represent the value of information in terms of welfare that displays
some degree of risk aversion so that variance also plays a role, however, a
comparison of insurancebased estimates of the WTP to avoid uncertainty would
be more appropriate.
2.5.4.3. Uncertainty and Discounting
Uncertainty about costs and/or values that are incurred or enjoyed over time
can be handled in two ways. One method calculates the present value across the
full range of possibilities; means and distributions of present values are the
result. The second method, reported in Arrow et al. (1996), converts
outcomes at each point in time into their certainty equivalents and then applies
discounting techniques. This approach raises the possibility of including risk
aversion into the calculation according to the foregoing definition.
The story is quite different when uncertainty surrounds selection of the discount
rate itself. It may not be appropriate, in these sorts of cases, to use a certaintyequivalent
discount rate (or an average over the range of possible rates). Weitzman (1998)
has noted, in particular, that the "lowest possible" discount rate
should be used for discounting the fardistant future. The reason, quite simply,
is that the expected value of present value over a range of discount rates is
not equal to the present value calculated with an average rate. Moreover, the
difference between the two is exaggerated in the distant future. Present values
computed with low rates, in fact, can dominate those computed with high rates
by orders of magnitude when the future is extended; thus, their contribution
to the expected value must be recognized explicitly in the selection of a discount
rate.
