Decision making in times of Knightian uncertainty: An info-gap perspective

Yakov Ben-Haim and Maria Demertzis

No 2015-42, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The distinction of risk vs uncertainty as made by Knight has important implications for policy selection. Assuming the former when the latter is relevant can lead to wrong decisions. With the aid of a stylized model that describes a bank's decision on how to allocate loans, the authors discuss decision making under Knightian uncertainty. They use the info-gap robust satisficing approach to derive a trade-off between confidence and performance (analogous to confidence intervals in the Bayesian approach but without assignment of probabilities). They show that this trade off can be interpreted as a cost of robustness and that the robustness analysis can lead to a reversal of policy preference from the putative optimum. They then compare this approach to the min-max method which is another main non-probabilistic approach available in the literature.

Keywords: uncertainty vs risk; confidence; robustness; satisficing; info-gap (search for similar items in EconPapers)
JEL-codes: C02 C18 D81 G10 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-upt
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http://www.economics-ejournal.org/economics/discussionpapers/2015-42
https://www.econstor.eu/bitstream/10419/110924/1/827394330.pdf (application/pdf)

Related works:
Journal Article: Decision making in times of Knightian uncertainty: An info-gap perspective (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201542

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