Discussion Paper

No. 2015-46 | June 23, 2015
How to Cope With (New) Uncertainties: A Bounded Rationality Approach

Abstract

A rigorous reconstruction of scenario-based real choice making reveals the incompleteness of decision-modeling and the practical prevalence of uncertainty. Theoretically complete models conceal it. As a remedy a scenario-based procedure of coping with uncertainty can prescribe how the boundedly rational decision-maker should proceed from her or his internal point of view. Though models of substantive rationality cannot serve as guidance for decision-making under uncertainty, we can improve prescriptions for coping with uncertainties in view of evidence of substantive success or failure. Decision theory should aim for a reflective equilibrium incorporating internalist-prescriptive and externalist-descriptive aspects to turn good into better practice.

JEL Classification:

D80, D01, D03, D21

Assessment

  • Downloads: 1627

Links

Cite As

Werner Güth and Hartmut Kliemt (2015). How to Cope With (New) Uncertainties: A Bounded Rationality Approach. Economics Discussion Papers, No 2015-46, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2015-46


Comments and Questions


Romar Correa - comment on the WG and HK paper
July 02, 2015 - 08:05

I am not alone in looking forward to the seminal work of WG and HK. Can only hope that my muddles through this paper are useful.
Does the relationship between the aspiration functions, A, and the payoff functions, f, need to be made explicit here or elsewhere? The only occasion ...[more]

... a connection is suggested is when a strategy is added to the strategy set. Would operating with the former be called satisficing and with the latter, optimizing? I was uncertain about the vector of l elements characterising “action goals”. Is it the case that an agent picks one aspiration level at each iteration? All boundedly rational agents will have their own goal vectors of different dimensions. Will not equilibrium demand the picking of a scalar? What is the definition of equilibrium, Nash or otherwise?


Björn Vollan - Uncertainties and climate change
July 02, 2015 - 14:11

Indeed, many problems arise from being overconfident with economic analytical models. Not only the financial crises but also how we deal with potential disasters such as a combination of tsunamis and nuclear power plants. One of the largest uncertainties mankind is facing is the exact impacts from climate change and ...[more]

... whether mitigation and adaptation strategies will work out as expected. The biggest uncertainty is maybe not whether the climate models are correct but how, and whether other countries, regions, individuals will react. In the context of climate change the framework may offer some very interesting insights and testable hypothesis for future lab experiments.

Individuals being exposed to threats of climate change already today need to take one-shot decisions on whether to stay or to migrate and stop farming etc. Thus, one important question may be how one can learn about uncertainty when one can only take one irreversible decision and has not really the possibility to learn from others choices. A bounded rational individual may do nothing since the uncertainty she is facing is too big and change from increasing climate is only accruing slowly.

On the level of regions and countries, the precautionary principle would however, suggest action instead of inaction. Thus, how a collective decides may be different than how individuals decide. A potential interesting question could be whether bounded rational individuals are more likely to make mistakes or whether groups consisting of bounded rational individuals are more prone to mistakes?.

In the context of climate change there is additionally the case that some lobbyists will intentionally try to spread doubts, playing down the scientific consensus, and focusing on uncertainties. Thus, although more knowledge is generated the initial uncertainty does seem to prevail with individuals for quite a long time.

Maybe an interesting paper dealing with uncertainty in climate change is Weitzman, Martin L. 2014. "Fat Tails and the Social Cost of Carbon." American Economic Review, 104(5): 544-46.


Anonymous - Referee Report1
July 17, 2015 - 08:08

see attached file


Konstantinos Katsikopoulos, Max Planck Institute for Human Development - Referee Report 2
July 24, 2015 - 11:07

see attached file


Max Albert, University Giessen, Germany - Reader comment
August 03, 2015 - 09:52

see attached file


Werner Güth and Hartmut Kliemt - Responses to reports and comments
February 11, 2016 - 09:38

see attached file