Revising Knowledge: A Hierarchical Approach

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9309515 Morris In the last twenty years, economists have made tremendous strides in understanding the role of uncertainty and imperfect information in the economy. Applied fields as diverse as macroeconomics, labor economics and industrial organization are increasingly focussed on the superior information which some economic participants have relative to others. This progress has been possible because of the existence of a standard, well understood model of how economic decision makers make choices under uncertainty. It is assumed that economic decision makers can imagine every possible relevant event which may have occurred in the past and may occur in the future. Their lack of complete information is reflected in the fact that - while they can imagine all relevant circumstances - they do not in fact know which circumstances have transpired or will transpire in the future. An implication of this standard approach is that whenever an economic decision maker does not know something, he or she knows that he or she does not know it. This model provides a useful starting point. But a series of recent work, by the principal investigator and others, has focussed on models of incomplete information which reflect the fact that economic decision makers not only do not know which circumstances have transpired or will transpire, but also they do not necessarily understand what all the relevant circumstances are. Thus we allow for the possibility that a decision maker may not know something, and may not know that he or she does not know it. Thus the first objective of this research project is to complete the principal investigator's development of a more realistic model of choice under uncertainty. But there is a critical conceptual problem which arises in this construction. Economists seek to explain choices, including choices under uncertainty, as a reflection of the decision makers' preferences. But in constructing a model of uncertainty, decision makers' preferences are part of the description of the relevant circumstances in the world. The second objective of the project is to provide a hierarchical description of preferences which gets around this circularity. This will provide a solid analytic foundation for a more realistic understanding of how economic decision makers cope with uncertainty. ***