Decision Making in Times of Uncertainty: An Info-Gap Perspective

23 Pages Posted: 28 Nov 2015

See all articles by Yakov Ben-Haim

Yakov Ben-Haim

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering

Maria Demertzis

Bruegel

Date Written: November 26, 2015

Abstract

The distinction of risk vs uncertainty as made by Knight has important implications for policy selection. Assuming the former when the latter is relevant can lead to wrong decisions. With the aid of a stylized model that describes a bank’s decision on how to allocate loans, we discuss decision making under Knightian uncertainty. We use the info-gap robust satisficing approach to derive a trade-off between confidence and performance (somewhat analogous to confidence intervals in the Bayesian approach but without assignment of probabilities). We then contrast how decisions change when following this approach by comparison to the other main non-probabilistic approach available in the literature, namely min-max.

Keywords: Uncertainty vs risk, confidence, robustness, satisficing, info-gap

JEL Classification: C11, D81, G10

Suggested Citation

Ben-Haim, Yakov and Demertzis, Maria, Decision Making in Times of Uncertainty: An Info-Gap Perspective (November 26, 2015). De Nederlandsche Bank Working Paper No. 487. Available at SSRN: https://ssrn.com/abstract=2696000 or http://dx.doi.org/10.2139/ssrn.2696000

Yakov Ben-Haim (Contact Author)

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

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