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Coping with ignorance: unforeseen contingencies and non-additive uncertainty

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  • Paolo Ghirardato

    ()
    (Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125, USA)

Abstract

In 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 Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 17 (2001)
Issue (Month): 2 ()
Pages: 247-276

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Handle: RePEc:spr:joecth:v:17:y:2001:i:2:p:247-276

Note: Received: December 16, 1999; revised version: March 22, 2000
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Related research

Keywords: Unforeseen contingencies; Underspecified decision problem; Belief functions; Choquet integrals; Pessimism index.;

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Cited by:
  1. Spyros Galanis, 2013. "Unawareness of theorems," Economic Theory, Springer, vol. 52(1), pages 41-73, January.
  2. Nabil I. Al-Najjar & Luciano De Castro, 2010. "Uncertainty, Efficiency and Incentive Compatibility," Discussion Papers 1532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Hiroyuki Nakata, 2011. "Equivalent comparisons of information channels," Theory and Decision, Springer, vol. 71(4), pages 559-574, October.
  4. Luca Rigotti & Matthew Ryan & Rhema Vaithianathan, 2011. "Optimism and firm formation," Economic Theory, Springer, vol. 46(1), pages 1-38, January.
  5. Jürgen Eichberger & David Kelsey, 1999. "E-Capacities and the Ellsberg Paradox," Theory and Decision, Springer, vol. 46(2), pages 107-138, April.
  6. Marie-Louise Vierø, 2009. "Exactly what happens after the Anscombe–Aumann race?," Economic Theory, Springer, vol. 41(2), pages 175-212, November.
  7. Jean-Yves Jaffray & Meglena Jeleva, 2011. "How to deal with partially analyzable acts?," Theory and Decision, Springer, vol. 71(1), pages 129-149, July.
  8. Youichiro Higashi & Kazuya Hyogo, 2012. "Lexicographic expected utility with a subjective state space," Economic Theory, Springer, vol. 49(1), pages 175-192, January.
  9. Vassili Vergopoulos, 2011. "Dynamic consistency for non-expected utility preferences," Economic Theory, Springer, vol. 48(2), pages 493-518, October.
  10. Peter Wakker, 2011. "Jaffray’s ideas on ambiguity," Theory and Decision, Springer, vol. 71(1), pages 11-22, July.

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