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Model Uncertainty

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  • Robin Musolff

  • Florian Zimmermann

Abstract

Mental models help people navigate complex environments. This paper studies how people deal with model uncertainty. In an experiment, participants estimate a company’s value, facing uncertainty about which one of two models correctly determines its true value. Using a between subjects design, we vary the degree of model complexity. Results show that in high-complexity conditions people fully neglect model uncertainty in their actions. However, their beliefs continue to reflect model uncertainty. This disconnect between beliefs and actions suggests that complexity leads to biased decision-making, while beliefs remain more nuanced. Furthermore, we show that complexity, via full uncertainty neglect, leads to higher confidence in the optimality of own actions.

Suggested Citation

  • Robin Musolff & Florian Zimmermann, 2025. "Model Uncertainty," CRC TR 224 Discussion Paper Series crctr224_2025_697, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2025_697
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp697
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    Keywords

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    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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