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Economic Theory

, Volume 17, Issue 2, pp 247–276 | Cite as

Coping with ignorance: unforeseen contingencies and non-additive uncertainty

  • Paolo Ghirardato
Research Articles

Summary.

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 and Phrases: Unforeseen contingencies, Underspecified decision problem, Belief functions, Choquet integrals, Pessimism index. 
JEL Classification Numbers: D81, L22. 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2001

Authors and Affiliations

  • Paolo Ghirardato
    • 1
  1. 1.Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125, USA (e-mail: paolo@hss.caltech.edu) US

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