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Full-Text Articles in Social and Behavioral Sciences
Game Theory Without Partitions, And Applications To Speculation And Consensus, John Geanakoplos
Game Theory Without Partitions, And Applications To Speculation And Consensus, John Geanakoplos
Cowles Foundation Discussion Papers
Decision theory and game theory are extended to allow for information processing errors. This extended theory is then used to reexamine market speculation and consensus, both when all actions (opinions) are common knowledge and when they may not be. Five axioms of information processing are shown to be especially important to speculation and consensus. They are called nondelusion, knowing that you know, nested, balanced, and positively balanced. We show that it is necessary and sufficient that each agent’s information processing errors be nondeluded and (1) balanced so that the agents cannot agree to disagree, (2) positively balanced so that it …
Market Innovation And Entrepreneurship: A Knightian View, Truman F. Bewley
Market Innovation And Entrepreneurship: A Knightian View, Truman F. Bewley
Cowles Foundation Discussion Papers
Stimulated by Frank Knight’s work, “Risk, Uncertainty and Profit,” I present a theory of innovation based on what I term Knightian decision theory. This theory includes a concept of uncertainty aversion, a behavioral property that makes people reluctant to undertake new unevaluatable risks. This aversion is compounded when individuals are obliged to cooperate in undertaking risks. The theory leads directly to the conclusion that innovation in business is the natural domain of individual investors with unusually low levels of uncertainty aversion. Also, it should be difficult to innovate new markets for insurance of unevaluatable risks, for the success of a …