Blog of Sara Jakša

What is Pareto Optimal Decision?

Pareto optimum position is a concept in the economics, that describes the position, where the overall welfare gain is the highest. Where the as a country or a society can function on the best level. While it was originally mostly used in the materialistic sense, there are also applications for our daily life.

The Pareto optimal decision is the one, where the group, doesn't matter what kind, comes closer to the Pareto optimal position. But to do that, there are criteria, that have to be fulfilled, for the decision to Pareto optimal.

The first criteria is, that at least one person or sub group of people's well-being have to improve. This usually refers to the person or group, that make decisions or have the power to influence decisions. The second criteria is, that none of the people or sub groups are to be worse off, than before.

If there is no decision, that can satisfy both criteria, then the so-called second best solution is implemented. Making one group better of, at the expense of the other. The situations like that are rare in the real world, even when it seems like they are not.

Lest go through the example, to see it in action. There are two friends, lets called them Mina and Sasha, that are not speaking with each other, because they are both angry at each other (you can imagine any reason here). Then Sasha remembers, that they still have a school paper to present in school. But person Sasha knows, that Mina will not remember it, because Mina counts on her to remind her.

So the person A have a couple of decisions, that she could make. She could apologize and do the paper together, she could ask the teacher to make the paper herself, she could ignore the situation, she could prepare the paper herself and explained to teacher, that Mina did not help. There are other decisions, and they are only limited by the premise of the situation and the imagination of the decision maker.

Lets analyze this possibility. No matter what she does, she can't be worse off. But the third option (ignoring the situation) is actually the one, that does not improve the situation either. So this one is out.

But 2. (asking the teacher) and 4. (making the paper herself) put Mina in the worse position than before, since her grade will be lower, counting on the reminded, that will not came.

That leaves the 1. solution (apologize) as the best one, because it is the only one, that improves the Sasha's position, while not hurting Mina's position.

Most of the time, the situations are more complicated than that, so seeing the consequences could be harder. But as long as we let the two principles guide us (somebody profits, and nobody suffers), I am sure we are going to make a better society.