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Coping with ignorance: unforeseen contingencies and non-additive uncertainty

Ghirardato, Paolo (2001) Coping with ignorance: unforeseen contingencies and non-additive uncertainty. Economic Theory, 17 (2). pp. 247-276. ISSN 0938-2259. doi:10.1007/PL00004108.

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In real-life decision problems, decision makers are never provided with the necessary background structure: the set of states of the world, the outcome space, the set of actions. They have to devise all these by themselves. I model the (static) choice problem of a decision maker (DM) who is aware that her perception of the decision problem is too coarse, as for instance when there might be unforeseen contingencies. I make a “bounded rationality'' assumption on the way the DM deals with this difficulty, and then I show that imposing standard subjective expected utility axioms on her preferences only implies that they can be represented by a (generalized) expectation with respect to a non-additive measure, called a belief function. However, the axioms do have strong implications for how the DM copes with the type of ignorance described above. Finally, I show that some decision rules that have been studied in the literature can be obtained as a special case of the model presented here (though they have to be interpreted differently).

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Additional Information:© 2001 Springer. Received: December 16, 1999; revised version: March 22, 2000. This paper is a reincarnation of chapter 1 of my doctoral dissertation at UC Berkeley. An earlier version was circulated with the title “Unforeseen Contingencies, Belief Functions, and the Comparative Statics of Belief.” Besides the patient audiences at many Schools and Conferences, I am very grateful to my adviser Bob Anderson and to Chris Shannon, Peter Wakker, and an anonymous referee for extremely helpful and detailed comments. I also thank Kim Border, Adriana Castaldo, Eddie Dekel, Jeff Ely, Tzachi Gilboa, Chew Soo Hong, Edi Karni, Peter Klibanoff, Piero La Mura, Bart Lipman, Alessandro Lizzeri, Mark Machina, Massimo Marinacci, Tom Marschak, Debbie Minehart, Suzanne Scotchmer and Daniele Terlizzese for stimulating discussion. Needless to say, they are not to be blamed for all the errors in the paper. Support first from the Università Bocconi, and later from an Alfred P. Sloan Doctoral Dissertation Fellowship is gratefully acknowledged.
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Università BocconiUNSPECIFIED
Subject Keywords:Unforeseen contingencies, Underspecified decision problem, Belief functions, Choquet integrals, Pessimism index.
Issue or Number:2
Classification Code:JEL Classification Numbers: D81, L22
Record Number:CaltechAUTHORS:20170824-133956964
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Official Citation:Ghirardato, P. Econ Theory (2001) 17: 247.
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80769
Deposited By: Ruth Sustaita
Deposited On:24 Aug 2017 23:17
Last Modified:15 Nov 2021 19:38

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