We distinguish three qualitatively different types of uncertainty—ethical, option and state space uncertainty—that are distinct from state uncertainty, the empirical uncertainty that is typically measured by a probability function on states of the world. Ethical uncertainty arises if the agent cannot assign precise utilities to consequences. Option uncertainty arises when the agent does not know what precise consequence an act has at every state. Finally, state space uncertainty exists when the agent is unsure how to construct an exhaustive state space. (...) These types of uncertainty are characterised along three dimensions—nature, object and severity—and the relationship between them is examined. We conclude that these different forms of uncertainty cannot be reduced to empirical uncertainty about the state of the world without inducing an increase in its severity. (shrink)

This paper presents an axiomatic framework for the priority heuristic, a model of bounded rationality in Selten’s (in: Gigerenzer and Selten (eds.) Bounded rationality: the adaptive toolbox, 2001) spirit of using empirical evidence on heuristics. The priority heuristic predicts actual human choices between risky gambles well. It implies violations of expected utility theory such as common consequence effects, common ratio effects, the fourfold pattern of risk taking and the reflection effect. We present an axiomatization of a parameterized version of the (...) heuristic which generalizes the heuristic in order to account for individual differences and inconsistencies. The axiomatization uses semiorders (Luce, Econometrica 24:178–191, 1956), which have an intransitive indifference part and a transitive strict preference component. The axiomatization suggests new testable predictions of the priority heuristic and makes it easier for theorists to study the relation between heuristics and other axiomatic theories such as cumulative prospect theory. (shrink)

Taking Savage's subjective expected utility theory as a starting point, this thesis distinguishes three types of uncertainty which are incompatible with Savage's theory for small worlds: ambiguity, option uncertainty and state space uncertainty. Under ambiguity agents cannot form a unique and additive probability function over the state space. Option uncertainty exists when agents cannot assign unique consequences to every state. Finally, state space uncertainty arises when the state space the agent constructs is not exhaustive, such that unforeseen contingencies can occur. (...) Chapter 2 explains Savage's notions of small and large worlds, and shows that ambiguity, option and state space uncertainty are incompatible with the small world representation. The chapter examines whether it is possible to reduce these types of uncertainty to one another. Chapter 3 suggests a definition of objective ambiguity by extending Savage's framework to include an exogenous likelihood ranking over events. The definition allows for a precise distinction between ambiguity and ambiguity attitude. The chapter argues that under objective ambiguity, ambiguity aversion is normatively permissible. Chapter 4 gives a model of option uncertainty. Using the two weak assumptions that the status quo is not uncertain, and that agents are option uncertainty averse, we derive status quo bias, the empirical tendency for agents to choose the status quo over other available alternatives. The model can be seen as rationalising status quo bias. Chapter 5 gives an axiomatic characterisation and corresponding representation theorem for the priority heuristic, a heuristic which predicts binary decisions be- tween lotteries particularly well. The chapter analyses the normative implications of this descriptive model. Chapter 6 defends the pluralist view of decision theory this thesis assumes. The chapter discusses possible applications of the types of uncertainty defined in the thesis, and concludes. (shrink)