Abstract: Economists have traditionally relied on the theory of subjective expected utility maximization (SEU) to model decision-making under uncertainty. However, over the years, a body of evidence has built up demonstrating that this theory, SEU, is not a good description of the way decision makers (DMs) commonly choose. Ambiguity (or uncertainty) aversion is a commonly observed behaviour that is inconsistent with SEU. Essentially, decision makers are ambiguity averse if they take into account how well they know the relevant odds and choose actions whose prospects are robust to the imprecision of their knowledge about the odds.
The talk will focus on some of the more prominent theories/models of decision making under ambiguous uncertainty proposed in the economics literature. We will first discuss the key intuitive and axiomatic foundations of these theories and then move on to a discussion about some recent work on applying these ideas in economic analysis. In the discussion of the foundational underpinning, we hope to understand the concerns of the decision maker these models try to capture and an intuition of the way they actually achieve that (to the extent they do). One application will demonstrate some implications of the phenomena of ambiguity aversion on trading in financial markets and discuss to what extent they shed light on some key events of the recent financial crises. A second application will discuss the relevance of these models for policy decisions dealing with climate change.
Sujoy Mukerji (PhD, Yale), Professor of Economics, Oxford University, works on modern decision theory, in particular on theories of decision making under ambiguity, their foundations and their relevance in economic contexts. More details, including details of published and working papers may be found at http://www.economics.ox.ac.uk/index.php/staff/mukerji/