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 naÂ¨ıvely 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 dÃ©cideur rationnel est-il censÃ© rÃ©agir face Ã un problÃ¨me qui ne lui est pas familier lorsquâil existe une certaine incertitude, et en lâabsence dâune base sur laquelle effectuer des estimations probabilistes? Une solution consiste Ã utiliser une forme de la thÃ©orie de lâutilitÃ© espÃ©rÃ©e et de prÃ©sumer que les agents attribuent leurs propres probabilitÃ©s subjectives Ã chaque Ã©lÃ©ment de la reprÃ©sentation dâÃ©tat (sans doute connue). Par contraste, notre article prÃ©sente un modÃ¨le oÃ¹ les agents ne forment pas de probabilitÃ©s subjectives sur les Ã©lÃ©ments de la reprÃ©sentation dâÃ©tat, mais utilisent de nouveaux renseignements afin de mettre Ã jour leurs croyances sur les Ã©lÃ©ments formant la reprÃ©sentation dâÃ©tat. Le comportement des Ã©changes avec ce modÃ¨le dans un marchÃ© dâactifs simple et incertain nous mÃ¨ne Ã des prÃ©dictions diffÃ©rentes. En utilisant une expÃ©rience contrÃ´lÃ©e en laboratoire, nous avons vÃ©rifiÃ© les prÃ©dictions de ce modÃ¨le contre celles de la thÃ©orie de lâutilitÃ© espÃ©rÃ©e et contre lâhypothÃ¨se que les sujets agissent avec naÃ¯vetÃ© et sans recourir Ã une stratÃ©gie. Les rÃ©sultats suggÃ¨rent quâun manque de probabilitÃ©s subjectives nâimplique pas un comportement irrationnel ou imprÃ©visible, mais permet plutÃ´t aux individus dâutiliser autant lâinformation quâils possÃ¨dent que la connaissance de lâinformation quâils ne possÃ¨dent pas dans leur prise de dÃ©cision.
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Date of creation: 01 Oct 2007
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Uncertainty; non-expected utility; incomplete preferences; ambiguity.; Incertitude; utilité non espérée; préférences incomplètes; ambiguïté.;
Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ACC-2007-10-20 (Accounting & Auditing)
- NEP-ALL-2007-10-20 (All new papers)
- NEP-EXP-2007-10-20 (Experimental Economics)
- NEP-UPT-2007-10-20 (Utility Models & Prospect Theory)
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