The order of knowledge and robust action: How to deal with economic uncertainty?
Uncertainty in economics is generated by 'nature' but also by the model we use to 'produce the future'. The production of the future comprises besides the allocation of resources on different instruments (technologies, financial products) also the design of the instruments. Specialization and diversification considerations point to the advantages of targeting instruments to a rich set of possible future states. But, if a rich state space comes with unreliable probability measures, the actions based on such a set will be unreliable too. The proliferation of financial products is a salient example. This paper argues that an appropriate model for dealing with uncertainty keeps the knowledge required by the model from its user in line with the available knowledge. In particular, it proposes to order state spaces by their 'granularity' and 'coverage'. Appropriate upper bounds are derived for these characteristics. A practical implication of the presented approach would be to limit financial product innovation.
Volume (Year): 10 (2016)
Issue (Month): ()
|Contact details of provider:|| Postal: Kiellinie 66, D-24105 Kiel|
Phone: +49 431 8814-1
Fax: +49 431 8814528
Web page: http://www.economics-ejournal.org/
More information through EDIRC
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.:
- Acemoglu, Daron & Zilibotti, Fabrizio, 1997.
"Was Prometheus Unbound by Chance? Risk, Diversification, and Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 105(4), pages 709-751, August.
- Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
- Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers 1426, C.E.P.R. Discussion Papers.
- Paul M. Romer, 2015. "Mathiness in the Theory of Economic Growth," American Economic Review, American Economic Association, vol. 105(5), pages 89-93, May.
- J. M. Keynes, 1937. "The General Theory of Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 51(2), pages 209-223.
- Ricardo J. Caballero, 2010. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 85-102, Fall.
- Ricardo J. Caballero, 2010. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome," NBER Working Papers 16429, National Bureau of Economic Research, Inc.
- Pfleiderer, Paul, 2014. "Chameleons: The Misuse of Theoretical Models in Finance and Economics," Research Papers 3020, Stanford University, Graduate School of Business.
- Debreu, Gerard, 1991. "The Mathematization of Economic Theory," American Economic Review, American Economic Association, vol. 81(1), pages 1-7, March.
- Clemens Puppe & Yongsheng Xu, 2010. "Essential alternatives and freedom rankings," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 35(4), pages 669-685, October.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
- Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
- Puppe, Clemens, 1996. "An Axiomatic Approach to "Preference for Freedom of Choice"," Journal of Economic Theory, Elsevier, vol. 68(1), pages 174-199, January.
- George A. Akerlof & Robert J. Shiller, 2015. "Phishing for Phools: The Economics of Manipulation and Deception," Economics Books, Princeton University Press, edition 1, number 10534.
- Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
- David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
- Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:zbw:ifweej:201624. 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: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.