Utility maximization and catasphore aversion: A simulation test

Economists have proved that the exclusion of the effects of irreversibility from a decision-making framework is a specification error which leads to sub-optimal solutions. Consequently, in any cost-benefit framework, the effects of an irreversibility are included in the form of an option value. Unfortunately, in the real world, there exist certain potential irreversibilities that jeopardize the very existence of the decision-making entity, were they to occur. We demonstrate that if the effects of such irreversibilities are modeled in terms of a finite option value (in cost-benefit analysis) then the optimal solutions derived therefrom may be unable to avert a potential catastrophe. In theory, an infinite option value should lead to catastrophe-averting decisions in such situations. However, in practice, such mathematical formulations tend to be intractable. In many situations, irreversible catastrophes proceed from a positive reinforcement of fluctuations in system behavior, primarily due to sympathetic responses in sub-systems. Engineers have designed relatively low-cost methods to dampen similar oscillations in physical systems. We demonstrate how such engineering type analysis can be used successfully to identify catastrophe-averting policies for a model ecosystem that faces irreversible famine that must be avoided as a precondition for survival.