Coping with ignorance: unforeseen contingencies and non-additive uncertainty

Paolo Ghirardato

Economic Theory, 2001, vol. 17, issue 2, 247-276

Abstract: 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).

Keywords: Unforeseen contingencies; Underspecified decision problem; Belief functions; Choquet integrals; Pessimism index. (search for similar items in EconPapers)
JEL-codes: D81 L22 (search for similar items in EconPapers)
Date: 2000-11-14
Note: Received: December 16, 1999; revised version: March 22, 2000
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Citations: View citations in EconPapers (9)

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Working Paper: Coping With Ignorance: Unforeseen Contingencies and Non-Additive Uncertainty (1996)
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