Decision making and trade without probabilities
What 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 lorsqu'il existe une certaine incertitude, et en l'absence d'une base sur laquelle effectuer des estimations probabilistes? Une solution consiste Ã utiliser une forme de la thÃ©orie de l'utilitÃ© 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 d'Ã©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 d'Ã©tat, mais utilisent de nouveaux renseignements afin de mettre Ã jour leurs croyances sur les Ã©lÃ©ments formant la reprÃ©sentation d'Ã©tat. Le comportement des Ã©changes avec ce modÃ¨le dans un marchÃ© d'actifs simple et incertain nous mÃ¨ne Ã des prÃ©dictio
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 48 (2011)
Issue (Month): 2 (October)
|Contact details of provider:|| Web page: http://link.springer.de/link/service/journals/00199/index.htm |
|Order Information:||Web: http://link.springer.de/orders.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bryan Routledge & Stanley Zin, 2009.
"Model Uncertainty and Liquidity,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 543-566, October.
- Bryan R. Routledge & Stanley E. Zin, 2000. "Model Uncertainty and Liquidity," Econometric Society World Congress 2000 Contributed Papers 1617, Econometric Society.
- Bryan Routledge & Stanley Zin, 2009. "Code files for "Model Uncertainty and Liquidity"," Computer Codes 08-143, Review of Economic Dynamics.
- Bryan R. Routledge & Stanley E. Zin, 2001. "Model Uncertainty and Liquidity," NBER Working Papers 8683, National Bureau of Economic Research, Inc.
- Bryan R. Routledge, Stanley E. Zin, 2000. "Model Uncertainity And Liquidity," Computing in Economics and Finance 2000 368, Society for Computational Economics.
- Bryan Routledge & Stanley Zin, . "Model Uncertainty and Liquidity," GSIA Working Papers 2001-E17, Carnegie Mellon University, Tepper School of Business.
- David Easley & Aldo Rustichini, 1999. "Choice without Beliefs," Econometrica, Econometric Society, vol. 67(5), pages 1157-1184, September.
- David Ahn & Syngjoo Choi & Douglas Gale & Shachar Kariv, 2008.
"Estimating Ambiguity Aversion in a Portfolio Choice Experiment,"
Levine's Working Paper Archive
122247000000001989, David K. Levine.
- David Ahn & Syngjoo Choi & Douglas Gale & Shachar Kariv, 2014. "Estimating ambiguity aversion in a portfolio choice experiment," Quantitative Economics, Econometric Society, vol. 5, pages 195-223, 07.
- Luciano De Castro & Marialaura Pesce & Nicolas Yannelis, 2011.
"Core and Equilibria under ambiguity,"
1534, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- John Quiggin, 2007. "Ambiguity and the Value of Information: An Almost-objective Events Analysis," Economic Theory, Springer, vol. 30(3), pages 409-414, March.
- Glenn Harrison & John List, 2008.
"Naturally occurring markets and exogenous laboratory experiments: A case study of the winner's curse,"
Framed Field Experiments
00266, The Field Experiments Website.
- GlennW. Harrison & JohnA. List, 2008. "Naturally Occurring Markets and Exogenous Laboratory Experiments: A Case Study of the Winner's Curse," Economic Journal, Royal Economic Society, vol. 118(528), pages 822-843, 04.
- Glenn W. Harrison & John A. List, 2007. "Naturally Occurring Markets and Exogenous Laboratory Experiments: A Case Study of the Winner's Curse," NBER Working Papers 13072, National Bureau of Economic Research, Inc.
- Chen, Kay-Yut & Plott, Charles R., 1998.
"Nonlinear Behavior in Sealed Bid First Price Auctions,"
Games and Economic Behavior,
Elsevier, vol. 25(1), pages 34-78, October.
- Chen, Kay-Yut & Plott, Charles R., . "Nonlinear Behavior in Sealed Bid First Price Auctions," Working Papers 774, California Institute of Technology, Division of the Humanities and Social Sciences.
- Luca Rigotti & Chris Shannon, 2005.
"Uncertainty and Risk in Financial Markets,"
Econometric Society, vol. 73(1), pages 203-243, 01.
- Luca Rigotti & Chris Shannon=20, 2002. "Uncertainty and Risk in Financial Markets," Game Theory and Information 0201001, EconWPA.
- Rigotti, Luca & Shannon, Chris, 2001. "Uncertainty and Risk in Financial Markets," Department of Economics, Working Paper Series qt7pp7113z, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Rigotti, Luca & Shannon, Chris, 2001. "Uncertainty and Risk in Financial Markets," Department of Economics, Working Paper Series qt6m42r5rr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Larry Epstein & Martin Schneider, 2005.
"Ambiguity, Information Quality and Asset Pricing,"
RCER Working Papers
519, University of Rochester - Center for Economic Research (RCER).
- Jack Douglas Stecher & Timothy Shields & John Dickhaut, 2008.
"Generating ambiguity in the laboratory,"
08-10, Chapman University, Economic Science Institute.
- Marialaura Pesce & Peter Cramton & Nicholas C. Yannelis, 2010.
"A new perspective to rational expectations: maximin rational expectations equilibrium,"
1528, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Luciano De Castro & Marialaura Pesce & Nicholas C. Yannelis, 2011. "A new perspective to rational expectations: maximin rational expectations equilibrium," The School of Economics Discussion Paper Series 1107, Economics, The University of Manchester.
- Mark Machina, 2004. "Almost-objective uncertainty," Economic Theory, Springer, vol. 24(1), pages 1-54, 07.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Harsanyi, John C, 1995.
"Games with Incomplete Information,"
American Economic Review,
American Economic Association, vol. 85(3), pages 291-303, June.
- Han Ozsoylev & Jan Werner, 2011. "Liquidity and asset prices in rational expectations equilibrium with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 469-491, October.
- Scott Condie & Jayant V. Ganguli, 2011.
"Ambiguity and Rational Expectations Equilibria,"
Review of Economic Studies,
Oxford University Press, vol. 78(3), pages 821-845.
- Morris, Stephen, 1996. "The Logic of Belief and Belief Change: A Decision Theoretic Approach," Journal of Economic Theory, Elsevier, vol. 69(1), pages 1-23, April.
- repec:feb:framed:0030 is not listed on IDEAS
- Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 1998. "Standard State-Space Models Preclude Unawareness," Econometrica, Econometric Society, vol. 66(1), pages 159-174, January.
- Shin Hyun Song, 1993. "Logical Structure of Common Knowledge," Journal of Economic Theory, Elsevier, vol. 60(1), pages 1-13, June.
- Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 229-242, October.
When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:48:y:2011:i:2:p:275-288. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F Baum)
If references are entirely missing, you can add them using this form.