Verifiable Uncertainty

30 Pages Posted: 3 Jan 2024 Last revised: 5 Nov 2024

Date Written: November 05, 2024

Abstract

Real-world uncertainties can be difficult to classify into the neat boxes of risk and ambiguity. We suggest verifiability as a practical test for risk, and verifiable uncertainty — often in the form of mechanically implemented equally likely prizes — as a real-world representation of risk. We propose a set of rules by which an agent contrasts a general (unverifiable) event against the verifiable m out of n chances of winning a prize. Collectively the rules advocate a decision procedure in the spirit of the smooth model of ambiguity, where the agent evaluates verifiably equally likely prizes — an object we call classical lottery — by average (verifiable) utility and, for general prospect, combines various scenarios of how unverifiable uncertainty might unfold. The agent can hold distinct attitudes toward verifiable uncertainty and unverifiable uncertainty. In particular, combining scenarios in a conservative manner reflects aversion to unverifiable uncertainty. We illustrate verifiability as a useful concept for both normative and descriptive decision making.

Keywords: Decision Making, Risk, Ambiguity, Uncertainty

Suggested Citation

Li, Jingyuan and Tsetlin, Ilia and Wang, Fan, Verifiable Uncertainty (November 05, 2024). INSEAD Working Paper No. 2024/61/DSC, Available at SSRN: https://ssrn.com/abstract=4682611 or http://dx.doi.org/10.2139/ssrn.4682611

Jingyuan Li

Lingnan University ( email )

Ilia Tsetlin (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Fan Wang

ESSEC ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

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