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Decision-Making under Ambiguity and Unawareness: Theory an Applications
Last Updated: 2026-02-05 15:55:26
Abstract
This course reviews recent advances in modeling decision-making under ambiguity and under unawareness. Ambiguity refers to situations with unknown probabilities of states, whereas unawareness refers to the lack of conception of all payoff-relevant contingencies. We will study models that accommodate both phenomena into economic theory, and apply them to insurance problems and speculative trade.
Objective
After taking this course, students will be able to - Comprehend the recent literature on ambiguity - Comprehend the recent literature on unawareness - Apply ambiguity and unawareness models - Recognize new research topics in the above areas
Content
1. Choice Under Uncertainty 1.1. Probabilistic Beliefs and Subjective Expected Utility 1.2. Bayesian Updating and Its Limitations 1.3. Asymmetric Information, Knowledge and No-Speculative Trade 2. Choice under Ambiguity 2.1. Ellsberg Paradox 2.2. Maxmin Expected Utility 2.3. Smooth Ambiguity Model 2.4. Choquet Expected Utility 2.5. Parametric Ambiguity Models 2.6. Insurance under Ambiguity 3. Dynamic Choice under Ambiguity 3.1. Updating Ambiguous Beliefs 3.2. Ellsberg Paradox and Dynamic Behavior 3.3. Speculative Trade under Ambiguity 4. Games with Strategic Ambiguity 4.1. Equilibrium under Ambiguity 4.2. Duopolistic Competition and Coordination 4.3. Rationalizability and Strategic Ambiguity 5. Choice under Unawareness 5.1 Formal Models of Unawareness and Growing Awareness 5.2. Evolution of Preferences and Reverse Bayesianism 5.3 Speculative Trade under Unawareness
Resources
Lecture Notes
1. Choice Under Uncertainty.We discuss the canonical approach to modeling decision-making under uncertainty, the Subjective Expected Utility (SEU). In many economic applications, a decision maker responds to new information, which requires a dynamic version of the theory. We extend the SEU theory to cope with dynamic decision problems (Bayesianism). We discuss the main tenets and the main limitations of the Bayesian paradigm. We briefly review one recent approach to belief updating on events with a zero-probability. We derive and discuss the intriguing result on the impossibility of speculative trade among Bayesian agents.2. Static Choice under Ambiguity.We focus on decision-making under ambiguity. First, we recall the famous Ellsberg paradox, showing the descriptive limitation of the SEU theory. We then introduce the three widely studied generalizations of SEU in the economic literature: Choquet Expected Utility, Maxmin Expected Utility, and Smooth Ambiguity models. These models can account for ambiguity and a decision maker’s attitude towards it. We briefly elaborate on the concepts of ambiguity perception and ambiguity attitudes. We introduce a couple of intuitive parametric specifications of the ambiguity models, which are particularly suitable for economic applications. We apply one to study how ambiguity aversion affects demand for insurance.3. Dynamic Choice under Ambiguity.When new information is faced in an ambiguous environment, there are various ways to update non-probabilistic beliefs allowing us to accommodate broader behavioral phenomena. In particular, the decision maker may perceive signals as "bad" news or as "good'" news, reflected in the pessimistic and optimistic updating rules, respectively. We discuss the main theories of updating ambiguous beliefs, and show that they are empirically relevant. Moreover, we will study the role of asymmetric information and updating ambiguous beliefs for speculative trade. In particular, we show that a (common-knowledge) speculative trade is feasible if and only if private signals are ambiguous, other states may be unambiguous.4. Games with Strategic Ambiguity.We introduce the concept of strategic ambiguity. We present novel solution concepts for games under ambiguity, which generalize the standard Nash equilibrium to allow for ambiguous beliefs over the opponents' strategies and different attitudes towards strategic ambiguity. To study the effect of strategic ambiguity on economic behavior, we apply these concepts to solve a number of games in the area duopolistic competition and coordination. We also discuss a weaker solution concept, Choquet rationalizability. This concept does not rely on any consistency notion between equilibrium behavior and beliefs. It only requires that behavior is consistency with common knowledge of players' (Choquet) rationality.5. Choice under Unawareness.We discuss recent approaches to modeling unawareness and choice under growing awareness. Unawareness refers to a situation under uncertainty, or a state of mind, in which of a decision maker cannot conceive all the payoff-relevant states. What are the logical properties of unawareness? How could we formalize unawareness? We introduce the so-called lattice-approach to unawareness. We present two intuitive and tractable models of growing awareness. When awareness grows, the initial state space expands and so does the original decision problem. This requires the decision maker to extend her preference to a larger domain. We study how Subjective Expected Utility preferences may evolve in response to growing awareness (e.g., reverse Bayesianism). Finally, we relate speculative trade to asymmetric (un)awareness between traders.
Literature
Book: Gilboa, I. (2009). Theory of Decision under Uncertainty, Cambridge University Press. Surveys Articles: Ambiguity (Eichberger and Kelsey, 2009) The Oxford Handbook of Rational and Social Choice ed. by P. Anand, P. Pattanaik, and C. Puppe. Ambiguity and Ambiguity Aversion (Machina and Siniscalchi, 2014): Handbook of the Economics of Risk and Uncertainty, ed. by Machina M., K. Viscusi, Volume 1, 729-807. Ambiguity and the Bayesian Paradigm (Gilboa and Marinacci, 2015): Readings in Formal Epistemology, ed. by Arló-Costa H., V. Hendricks, J. van Benthem, Volume 1. Awareness (Schipper, B. 2014): Handbook of Epistemic Logic, ed. by H. van Ditmarsch, J. Y. Halpern, W. van der Hoek, and B. P. Kooi, London: College Publications, 77 – 141. Unawareness – A gentle introduction to both the literature and the special issue (Schipper, B. 2014): Mathematical Social Sciences, 70, 1–9 Remark: A list of articles related to the topics covered during the course will be provided in the first class.
General Information
- Language
- English
- Levels
- DR
Examination
- Type
- graded semester performance
Course Components
| Type | Title | Time & Place | Hours |
|---|---|---|---|
| lecture |
Decision-Making under Ambiguity and Unawareness: Theory an Applications
Irregular lecture
|
|
20 h semesterly |
Offered In
-
Doctoral Department of Management, Technology, and Economics (More Information at: )