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Risk, Uncertainty, and Heuristics

31 Pages Posted: 9 Sep 2015  

Shabnam Mousavi

Johns Hopkins Carey Business School; Center for Adaptive Behavior and Cognition, Max Planck Institute for Human Development

Gerd Gigerenzer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Human Development

Date Written: March 19, 2014

Abstract

Nearly a century ago, Frank Knight famously distinguished between risk and uncertainty with respect to the nature of decisions made in a business enterprise. He associated generating economic profit with making entrepreneurial decisions in the face of fundamental uncertainties. This uncertainty is complex because it cannot be reliably hedged unless it is reducible to risk. In making sense of uncertainty, the mathematics of probability that is used for risk calculations may lose relevance. Fast-and-frugal heuristics, on the other hand, provide robust strategies that can perform well under uncertainty. The present chapter describes the structure and nature of such heuristics and provides conditions under which each class of heuristics performs successfully. Dealing with uncertainty requires knowledge but not necessarily an exhaustive use of information. In many business situations, effective heuristic decision-making deliberately ignores information and hence uses fewer resources. In an uncertain world, less often proves to be more.

Keywords: Fast-and-frugal heuristics, Uncertainty, Complexity, Business decision-making

JEL Classification: A12, G00, M13, Z00

Suggested Citation

Mousavi, Shabnam and Gigerenzer, Gerd, Risk, Uncertainty, and Heuristics (March 19, 2014). Journal of Business Research, Vol. 67, No. 8, March 2014. Available at SSRN: https://ssrn.com/abstract=2657782

Shabnam Mousavi (Contact Author)

Johns Hopkins Carey Business School ( email )

1625 Massachusetts Ave
Washington, DC 20036
United States

Center for Adaptive Behavior and Cognition, Max Planck Institute for Human Development ( email )

Lentzeallee 94
Berlin, 14195
Germany

Gerd Gigerenzer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Human Development ( email )

Lentzeallee 94
D-14195 Berlin
Germany

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