Optimal Revelation of Life-Changing Information
Imagine you know that you are at risk of contracting a very serious genetic disease. You may, for instance, have inherited the genes that cause such a disease from your mother or father. If an accurate test was available that would tell you for sure whether the dis-ease would break out or not, would you take the test or would you be too scared?
That is the dilemma explored in a new CESifo working paper by Nikolaus Schweizer and Nora Szech. More precisely, the two authors investigate the conditions under which individuals tend to opt for less information; and what an optimal test should look like when it comes to revealing life-changing information. Since testing for genetic dispositions is becoming increasingly widespread, the topic of this working paper will surely gain importance in the near future.
According to a golden rule of economics, more information improves the quality of decision-making. The authors of this paper confront us with the limitations of this rule. Life-changing information may not be a utility-enhancing support when people make their life plans.
To illustrate this point, Schweizer and Szech develop a model whereby both doctor and patient strive to maximize the patient's utility. In this model, the doctor designs a test and the patient decides whether to take the test or not. Based on the observed information – there is naturally no information gain if the patient refuses to take the test – the patient then opts for the most suitable life plan. In other words, s/he chooses to work less, enjoy more leisure, travel more, and have kids earlier if concerned about falling ill later in life.
In the model the patient's utility consists of two crucial components: the first component reflects the anticipation of future utility, that is, the utility people gain today because they look forward to positive experiences in the future. Think, for instance, of an upcoming birthday party with good friends that makes your mood soar. The second component implies costs if the life plan is not compatible with the future health status. Taking the test reduces the costs of suboptimal planning, but advance knowledge of an illness may also imply lower anticipatory utility.
The authors subsequently show what the optimal test looks like in different scenarios. In extreme cases where patients attach a great deal of importance to the anticipatory utility term or the cost term, they tend to prefer either a perfectly non-revelatory or a perfectly revelatory test. In the majority of cases, however, the patient is said to care about the costs of non-optimal life-plans and anticipatory utility to a lesser degree. Depending on the patient's beliefs regarding his/her future health status, a good choice may be a coarse test. A coarse test perfectly reveals if the patient will remain healthy, but gives a pooling signal otherwise. Thus, patients have to downwardly adjust their beliefs about their health, but do not know for sure whether they are affected.
As the authors clarify, the main implication is not to abolish perfectly revelatory testing. Instead, they intend to offer the patients a variety of different tests including a perfectly non-revelatory, a perfectly revelatory and a coarse test. In practise, a coarse test is easily implemented if blood samples are mixed. If none of the tested people are affected by the disease, the test reveals the positive state. If only one individual is affected, this does not mean that the disease will break out in all people. Patients now have the chance to opt for the test that best suits their preferences and personality. Ultimately, having this choice can resolve the patient's dilemma.
Nikolaus Schweizer and Nora Szech, Optimal Revelation of Life-Changing Information CESifo Working Paper No. 5941.
Other CESifo Working Papers by Nikolaus Schweizer
Other CESifo Working Papers by Nora Szech