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Info-Gap Robust-Satisficing and the Probability of Survival

  • Yakov Ben-Haim
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    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.

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    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 138.

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    Date of creation: Apr 2007
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    Handle: RePEc:dnb:dnbwpp:138
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    1. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
    2. 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.
    3. 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.
    4. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
    5. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    6. Thaler, Richard H, 1994. "Psychology and Savings Policies," American Economic Review, American Economic Association, vol. 84(2), pages 186-92, May.
    7. 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.
    8. Iwai, Katsuhito, 2000. "A contribution to the evolutionary theory of innovation, imitation and growth," Journal of Economic Behavior & Organization, Elsevier, vol. 43(2), pages 167-198, October.
    9. Cecilia Chaing & Lindsay McSweeney, 2010. "A Behavioral Model of Rational Choice," CPI Journal, Competition Policy International, vol. 6.
    10. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
    11. Amartya Sen, 1997. "Maximization and the Act of Choice," Econometrica, Econometric Society, vol. 65(4), pages 745-780, July.
    12. Karsten Jeske, 2001. "Equity home bias: Can information cost explain the puzzle?," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 31-42.
    13. 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.
    14. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, July.
    15. 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.
    16. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
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