A measure of ambiguity (Knightian uncertainty)

Pavlo Blavatskyy ()
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Pavlo Blavatskyy: Montpellier Business School

Theory and Decision, 2021, vol. 91, issue 2, No 1, 153-171

Abstract: Abstract Uncertain or ambiguous events cannot be objectively measured by probabilities, i.e. different decision-makers may disagree about their likelihood of occurrence. This paper proposes a new decision-theoretical approach on how to measure ambiguity (Knightian uncertainty) that is analogous to axiomatic risk measurement in finance. A decision-theoretical measure of ambiguity is a function from choice alternatives (acts) to non-negative real numbers. Our proposed measure of ambiguity is derived from a novel assumption that ambiguity of any choice alternative can be decomposed into a left-tail ambiguity (uncertainty in the realization of relatively undesirable outcomes) and a right-tail ambiguity (uncertainty in the realization of relatively desirable outcomes). This decomposability assumption is combined with two standard assumptions: ambiguity sources (events) are independent (separable) from outcomes (consequences) and any elementary increase in uncertainty (increasing a more desirable outcome in a binary act) necessarily increases ambiguity.

Keywords: Knightian uncertainty; Ambiguity; Left-tail ambiguity; Decomposability; Elementary increase in uncertainty (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11238-020-09798-6

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