Coping with ignorance: unforeseen contingencies and non-additive uncertainty
AbstractIn real-life decision problems, decision makers are never provided with the necessary background structure: the set of states of the world, the outcome space, the set of actions. They have to devise all these by themselves. I model the (static) choice problem of a decision maker (DM) who is aware that her perception of the decision problem is too coarse, as for instance when there might be unforeseen contingencies. I make a "bounded rationality'' assumption on the way the DM deals with this difficulty, and then I show that imposing standard subjective expected utility axioms on her preferences only implies that they can be represented by a (generalized) expectation with respect to a non-additive measure, called a belief function. However, the axioms do have strong implications for how the DM copes with the type of ignorance described above. Finally, I show that some decision rules that have been studied in the literature can be obtained as a special case of the model presented here (though they have to be interpreted differently).
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 17 (2001)
Issue (Month): 2 ()
Note: Received: December 16, 1999; revised version: March 22, 2000
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Other versions of this item:
- Ghirardato, Paolo, 1996. "Coping With Ignorance: Unforeseen Contingencies and Non-Additive Uncertainty," Working Papers 945, California Institute of Technology, Division of the Humanities and Social Sciences.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
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