Decision making and trade without probabilities
AbstractWhat is a rational decision-maker supposed to do when facing an unfamiliar problem, where there is uncertainty but no basis for making probabilistic assessments? One answer is to use a form of expected utility theory, and assume that agents assign their own subjective probabilities to each element of the (presumably known) state space. In contrast, this paper presents a model in which agents do not form subjective probabilities over the elements of the state space, but nonetheless use new information to update their beliefs about what the elements of the state space are. This model is shown to lead to different predictions about trading behavior in a simple asset market under uncertainty. A controlled laboratory experiment tests the predictions of this model against those of expected utility theory and against the hypothesis that subjects act naÃÂ¨Ä±vely and non-strategically. The results suggest that a lack of subjective probabilities does not imply irrational or unpredictable behavior, but instead allows individuals to use both what they know and knowledge of what they do not know in their decision making. Comment un dÃÂ©cideur rationnel est-il censÃÂ© rÃÂ©agir face ÃÂ un problÃÂ¨me qui ne lui est pas familier lorsquÃ¢ÂÂil existe une certaine incertitude, et en lÃ¢ÂÂabsence dÃ¢ÂÂune base sur laquelle effectuer des estimations probabilistes? Une solution consiste ÃÂ utiliser une forme de la thÃÂ©orie de lÃ¢ÂÂutilitÃÂ© espÃÂ©rÃÂ©e et de prÃÂ©sumer que les agents attribuent leurs propres probabilitÃÂ©s subjectives ÃÂ chaque ÃÂ©lÃÂ©ment de la reprÃÂ©sentation dÃ¢ÂÂÃÂ©tat (sans doute connue). Par contraste, notre article prÃÂ©sente un modÃÂ¨le oÃÂ¹ les agents ne forment pas de probabilitÃÂ©s subjectives sur les ÃÂ©lÃÂ©ments de la reprÃÂ©sentation dÃ¢ÂÂÃÂ©tat, mais utilisent de nouveaux renseignements afin de mettre ÃÂ jour leurs croyances sur les ÃÂ©lÃÂ©ments formant la reprÃÂ©sentation dÃ¢ÂÂÃÂ©tat. Le comportement des Ã
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 48 (2011)
Issue (Month): 2 (October)
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- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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