Law for the Common Man: An Individual-Level Theory of Values, Expanded Rationality, and the Law

This article makes an admittedly bold attempt at outlining an analytical framework for addressing this question. Instead of looking at the legal implications of bounded rationality -- an exercise highly worthy in its own right -- this article advances a theory of expanded rationality. This theory retains the element of rationality in that people respond to incentives in an attempt to attain utility, and it does not question the observation that decision-making is often bounded due to various factors

A methodology for the risk assessment of climate variability and change under uncertainty

Existing methods for the assessment of the potential impacts of climate change in productive activities and sectors are usually limited to point estimates that do not consider the inherent variability and uncertainty of climatic and socioeconomic variables. This is a major drawback given that only a limited and potentially misleading estimation of risk can be expected when ignoring such determinant factors. In this paper, a new methodology is introduced that is capable of integrating the agent's beliefs and expert judgment into the assessment of the potential impacts of climate change in a quantitative manner by means of an objective procedure. The goal is to produce tailor-made information to assist decision-making under uncertainty in a way that is consistent with the current state of knowledge and the available subjective "expert" information. Time-charts of the evolution of different risk measures, that can be relevant for assisting decision-making and planning, can be constructed using this new methodology. This methodology is illustrated with a case study of coffee production in Mexico. Time-dependent probabilistic scenarios for coffee production and income, conditional on the agent's beliefs and expert judgment, are developed for the average producer under uncertain future conditions. It is shown that variability in production and income, generated by introducing climate variability and uncertainty are important factors affecting decision-making and the assessment of economic viability that are frequently ignored. The concept of Value at Risk, commonly applied in financial risk management, is introduced as a means for estimating the maximum expected loss for a previously chosen confidence level. Results are tailor-made for agents that have incomplete information and different beliefs. In this case study, the costs of climate change for coffee production in Veracruz are estimated to have a present value representing from 3 to 14 times the current annual value of coffee production in the state. © 2011 The Author(s)

Contracting for innovation under knightian uncertainty

At any given point in time, the collection of assets existing in the economy is observable. Each asset is a function of a set of contingencies. The union taken over all assets of these contingencies is what we call the set of publicly known states. An innovation is a set of states that are not publicly known along with an asset (in a broad sense) that pays contingent on those states. The creator of an innovation is an entrepreneur. He is represented by a probability measure on the set of new states. All other agents perceive the innovation as ambiguous: each of them is represented by a set of probabilities on the new states. The agents in the economy are classified with respect to their attitude towards this Ambiguity: the financiers are (locally) Ambiguity-seeking while the consumers are Ambiguity-averse. An entrepreneur and a financier come together when the former seeks funds to implement his project and the latter seeks new profit opportunities. The resulting contracting problem does not fall within the standard theory due to the presence of Ambiguity (on the financier’s side) and to the heterogeneity in the parties’ beliefs. We prove existence and monotonicity (i.e., truthful revelation) of an optimal contract. We characterize such a contract under the additional assumption that the financiers are globally Ambiguity-seeking. Finally, we re-formulate our results in an insurance framework and extend the classical result of Arrow [4] and the more recent one of Ghossoub. In the case of an Ambiguity-averse insurer, we also show that an optimal contract has the form of a generalized deductible

Contracting for Innovation under Ambiguity

At any given point in time, the collection of assets that exist in the economy is observable. Each asset is a function of a set of contingencies. The union taken over all assets of these contingencies is what we call the set of publicly known states. An innovation is a set of states that are not publicly known along with an asset (in a broad sense) that pays contingent on those states. The creator of an innovation is an entrepreneur. He is represented by a probability measure on the set of new states. All other agents perceive the innovation as ambiguous: each of them is represented by a set of probabilities on the new states. The agents in the economy are classified with respect to their attitude toward the Ambiguity: the financiers are (locally) ambiguity seeking while the consumers are ambiguity averse. An entrepreneur and a financier come together when the former seeks funds to implement his project and the latter seeks new profit opportunities. The resulting contracting problem does not fall within the standard theory due to the presence of Ambiguity (on the financier's side) and to the heterogeneity in the parties' beliefs. We prove existence and monotonicity (i.e., truthful revelation) of the optimal contract. We characterize this contract under the additional assumption that the financiers are globally ambiguity seeking. Finally, we re-formulate our results in an insurance framework and extend the classical result of Arrow-Borch-Raviv and the more recent one of Ghossoub. In the case of an Ambiguity averse insurer, we also show that the optimal contract has the form of a generalized deductible

Rationality, uncertainty aversion and equilibrium concepts in normal and extensive form games

This thesis contributes to a re-examination and extension of the equilibrium concept in normal and extensive form games. The equilibrium concept is a solution concept for games that is consistent with individual rationality and various assumptions about players' knowledge about the nature of their strategic interaction. The thesis argues that further consistency conditions can be imposed on a rational solution concept. By its very nature, a rational solution concept implicitly defines which strategies are non-rational. A rational player's beliefs about play by non-rational opponents should be consistent with this implicit definition of non-rational play. The thesis shows that equilibrium concepts that satisfy additional consistency requirements can be formulated in Choquet-expected utility theory, i.e. non-expected utility theory with non-additive or set-valued beliefs, together with an empirical assumption about players' attitude toward uncertainty. Chapter 1 introduces the background of this thesis. We present the conceptual problems in the foundations of game theory that motivate our approach. We then survey the decision-theoretic foundations of Choquet-expected utility theory and game-theoretic applications of Choquet-expected utility theory that are related to the present approach. Chapter 2 formulates this equilibrium concept for normal form games. This concept, called Choquet-Nash Equilibrium, is shown to be a generalization of Nash Equilibrium in normal form games. We establish an existence result for finite games, derive various properties of equilibria and establish robustness results for Nash equilibria. Chapter 3 extends the analysis to extensive games. We present the equivalent of subgame-perfect equilibrium, called perfect Choquet Equilibrium, for extensive games. Our main finding here is that perfect Choquet equilibrium does not generalize, but is qualitatively different from subgame-perfect equilibrium. Finally, in chapter 4 we examine the centipede game. It is shown that the plausible assumption of bounded uncertainty aversion leads to an 'interior' equilibrium of the centipede game

A Survey of Some Applications of the Idea of Ambiguity Aversion in Economics.

Subjective uncertainty is characterized by ambiguity if the decision maker has an imprecise knowledge of the probabilities of payoff relevant events. In such an instance, the decision maker's beliefs are better represented by a set of probability functions than by a unique probability function. An ambiguity averse decision maker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds. This paper attempts a (selective) survey of some of the achievements of the research program which has analyzed important economic phenomena using a methodology that departs from standard paradigm by explicitly allowing for ambiguity aversion. We specifically look at applications, and implications, of ambiguity aversion in three areas: design of bilateral economic contracts, the trade in financial contracts and financial markets and finally, strategic decision making in auctions. We also indicate the possible relevance of these findings to recent research in AI