In Austrian economics, judgment refers to decision making under uncertainty. Given that we live in a world of uncertainty, all of us use judgment when choosing what actions to perform. In our use of judgment, we form opinions about what goals we wish to achieve and the means by which to attain those goals. Merely wishing to achieve a goal does not guarantee that one will necessarily do so. For one to be successful in an endeavor, he must employ his will or volition and hope that external conditions of the world are such that his plan works and leads to his desired outcome.
In a world of uncertainty, there are no solutions for what our actions should be. For any goal that is not entirely self-dependent, there exists some uncertainty regarding whether one’s employment of volition will lead to the hoped-for result. A solution refers to when a certain answer for a problem may be derived. The sum 9 + 7 has a certain answer of 16 as it is an apodictic truth. However, the problem of what we should do in order to reach our economic goals does not have certain answers because of uncertain future conditions. Judgment allows us to act in the absence of certainty.
In a previous article, I had talked about Net Present Value (NPV) forecasting and how its usage by entrepreneurs allows them to have a proper framework for what ventures or enterprises to pursue. Despite their utility, NPV forecasts are only as good as the assumptions behind them. A prospective entrepreneur can generate as many forecasts as he would like, but he cannot treat any of them as certain. None of them function as solutions because the entrepreneur cannot be certain that his estimations about the conditions of reality will line up with what will really occur. He can only use his judgment to anticipate which forecasts are more likely to come true relative to others in proceeding with his actions.
Notably, the prospective entrepreneur still has control over how he plans and manages his ventures. While he cannot be perfectly certain whether or not he might achieve his goals, his employment of good judgment may help his chances. If the prospective entrepreneur were in the business of constructing homes in a market where consumers prefer single-family homes to large apartments, he may have better odds of achieving profit if he constructs the former as opposed to the latter. The outcome is never guaranteed, but not strictly random either.
Importantly, this characteristic of judgment distinguishes it from gambling. Many people think that starting a business or buying stock is a form of gambling. In most forms of gambling, a probability distribution is known from which odds are derived. If one were to gamble on the outcome of a fair six-sided dice, the probability of any one of the numbers being the outcome would be strictly 1 in 6. One could not employ better judgment in picking the number 3 rather than the number 5 in such a bet. The same is not true of starting a business or purchasing stocks. One may accept or reject business ideas based on their judgment of the feasibility of the venture. Similarly, one may pick stocks based on some form of fundamental analysis. While there are no solutions possible in these enterprises, they do not constitute gambling either, where the outcome is completely random.
Judgments are not arbitrary. They reflect ideas held about reality by individuals. Having a better grasp of reality allows skilled individuals to employ appropriate means to successfully bring about the changes they wish to see. They are neither solely lucky nor possess the power to bend reality to their will. Instead, they use their judgment to act in accordance with a hypothesis that, if true, would cause desired results. While there are no correct solutions to be had, there remain right judgments and wrong judgments to be distinguished ex post.
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