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Info-Gap Robust-Satisficing and the Probability of Survival

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  • Yakov Ben-Haim

Abstract

In this paper we study why, and when, and in what form, a satisficing strategy is a better bet for survival, than a strategy which uses the best available information in attempting to optimize the outcome. We prove that, under severe uncertainty, a robust-satisficing decision has a better probability of survival than a best-model outcome-optimizing decision. These results are based on non-probabilistic info-gap decision theory, which provides a quantification of Knightian uncertainty. We show that our results are applicable to Bayesian mixing of two models, allocation between a risky and a risk-free asset, foraging behavior, explaining Ellsberg's 'paradox', satisfying multiple requirements, forecasting in dynamical systems, and managing exogenous uncertainties.

Suggested Citation

  • Yakov Ben-Haim, 2007. "Info-Gap Robust-Satisficing and the Probability of Survival," DNB Working Papers 138, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:138
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    File URL: https://www.dnb.nl/binaries/Working%20Paper%20138-2007_tcm46-146795.pdf
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    References listed on IDEAS

    as
    1. Yakov Ben-Haim & Karsten Jeske, 2003. "Home bias in financial markets: robust satisficing with info gaps," FRB Atlanta Working Paper 2003-35, Federal Reserve Bank of Atlanta.
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    3. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    4. Crain, W. Mark & Shughart, William II & Tollison, Robert D., 1984. "The convergence of satisficing to marginalism : An empirical test," Journal of Economic Behavior & Organization, Elsevier, vol. 5(3-4), pages 375-385.
    5. Amartya Sen, 1997. "Maximization and the Act of Choice," Econometrica, Econometric Society, vol. 65(4), pages 745-780, July.
    6. Cecilia Chaing & Lindsay McSweeney, 2010. "A Behavioral Model of Rational Choice," CPI Journal, Competition Policy International, vol. 6.
    7. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
    8. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
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    11. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
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    13. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    14. Thaler, Richard H, 1994. "Psychology and Savings Policies," American Economic Review, American Economic Association, vol. 84(2), pages 186-192, May.
    15. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
    16. Kaufman, Bruce E., 1999. "Emotional arousal as a source of bounded rationality," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 135-144, February.
    17. Karsten Jeske, 2001. "Equity home bias: Can information cost explain the puzzle?," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 31-42.
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    More about this item

    Keywords

    Satisficing; bounded rationality; Knightian uncertainty; robustness; probability of sur-vival; info-gap theory.;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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