Decision Making in Times of Uncertainty: An Info-Gap Perspective
23 Pages Posted: 28 Nov 2015
Date Written: November 26, 2015
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: Suggested Citation