Economic Theory

, Volume 58, Issue 1, pp 59–98 | Cite as

Decision making in phantom spaces

Research Article

Abstract

This paper introduces a new model of decision making under uncertainty. Aiming to provide a more realistic depiction of decision making, it generalizes the von Neumann–Morgenstern theory by including additional tiers of uncertainty. In this model, beliefs about the probabilities of events are ambiguous and their consequential utilities are vague; both are naturally formulated in the phantom space using phantom numbers. The degree of uncertainty, determined by the decision maker’s beliefs, is distinguished from the attitude toward uncertainty, which is drawn from her preferences. Decision making under ambiguity is a particular case of our model in which probabilities are ambiguous, but resulting utilities of events are knowable.

Keywords

Phantom probability Decision making under uncertainty   Expected utility Imprecise risk Ambiguity Uncertainty Ellsberg paradox 

JEL Classification

C65 D81 D83 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  1. 1.Department of Economics and Finance, Zicklin School of BusinessBaruch CollegeNew York USA
  2. 2.Department of MathematicsUniversity of BremenBremenGermany

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