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Coping With Ignorance: Unforeseen Contingencies and Non-Additive Uncertainty

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  • Ghirardato, Paolo

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

Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 945.

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Date of creation: May 1996
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Handle: RePEc:clt:sswopa:945

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Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125
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Cited by:
  1. Peter Wakker, 2011. "Jaffray’s ideas on ambiguity," Theory and Decision, Springer, vol. 71(1), pages 11-22, July.
  2. Luca Rigotti & Matthew Ryan & Rhema Vaithianathan, 2011. "Optimism and firm formation," Economic Theory, Springer, vol. 46(1), pages 1-38, January.
  3. Galanis, Spyros, 2007. "Unawareness of theorems," Discussion Paper Series In Economics And Econometrics 51816, Economics Division, School of Social Sciences, University of Southampton.
  4. Vassili Vergopoulos, 2011. "Dynamic consistency for non-expected utility preferences," Economic Theory, Springer, vol. 48(2), pages 493-518, October.
  5. Hiroyuki Nakata, 2011. "Equivalent comparisons of information channels," Theory and Decision, Springer, vol. 71(4), pages 559-574, October.
  6. 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.
  7. Marie-Louise Vierø, 2009. "Exactly what happens after the Anscombe–Aumann race?," Economic Theory, Springer, vol. 41(2), pages 175-212, November.
  8. Eichberger, J. & Kelsey, D., 1996. "E-Capacities and the Ellsberg Paradox," Discussion Papers 96-13, Department of Economics, University of Birmingham.
  9. Jean-Yves Jaffray & Meglena Jeleva, 2011. "How to deal with partially analyzable acts?," Theory and Decision, Springer, vol. 71(1), pages 129-149, July.
  10. Youichiro Higashi & Kazuya Hyogo, 2012. "Lexicographic expected utility with a subjective state space," Economic Theory, Springer, vol. 49(1), pages 175-192, January.

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