Ambiguity and Economic Activity: Implications for the Current Crisis in Credit Markets

Sujoy Mukerji

Chapter Chapter 3 in The Economic Crisis and the State of Economics, 2010, pp 43-50 from Palgrave Macmillan

Abstract: Abstract This chapter discusses some recent developments in economics regarding theories of decision making in conditions of uncertainty and argues that these new theories and models are singularly useful in explaining and understanding the ongoing credit crises. Moreover, it argues that the understanding based on these theories has significant policy implications about how the crises may be alleviated. While the formal articulation of these theories took place only recently, the ideas that formed their core had been discussed by Keynes1 and Knight2 in the 1920s. They had pointed out that for many important economic decisions, the decision maker (DM) faces “genuine” uncertainty such that he does not have reliable information about the relevant odds and that in such circumstances the uncertainty perceived by the DM may not be summarized by a single probability distribution, as in standard practice. It was also posited that a DM’s choice behavior would also be determined by his taking into account how much he knew about the relevant odds. In decision making under conditions of uncertainty it is often the case that the decision maker’s knowledge about the likelihood of contingent events is consistent with more than one probability distribution.

Keywords: Decision Maker; Ambiguity Aversion; Counterparty Risk; Knightian Uncertainty; Significant Policy Implication (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-10569-0_4

Ordering information: This item can be ordered from
http://www.palgrave.com/9780230105690

DOI: 10.1057/9780230105690_4

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().