Ignorance and Uncertainty

Proposes novel methods to incorporate ignorance and uncertainty into economic modeling without complex mathematics.

Olivier Compte (Author), Andrew Postlewaite (Author)

9781108422024, Cambridge University Press

Hardback, published 13 December 2018

320 pages, 54 b/w illus.
23.5 x 15.8 x 2 cm, 0.54 kg

'In this brilliant and path-breaking book, Compte and Postlewaite offer a new way of modeling agent reasoning in microeconomic theory, striking a balance between the demands of equilibrium analysis with 'perfect' rationality and the realities of human cognition. They do not focus on a particular anomaly while embracing the rest of the game-theoretical assumptions. Rather, they focus on plausible ways of reasoning for economic agents, allowing a distinction between the agents' and the modeler's world view. In doing so, Compte and Postlewaite provide a new language for modeling bounded rationality.' Itzhak Gilboa, Tel Aviv University and École des hautes études commerciales de Paris

Born of a belief that economic insights should not require much mathematical sophistication, this book proposes novel and parsimonious methods to incorporate ignorance and uncertainty into economic modeling, without complex mathematics. Economics has made great strides over the past several decades in modeling agents' decisions when they are incompletely informed, but many economists believe that there are aspects of these models that are less than satisfactory. Among the concerns are that ignorance is not captured well in most models, that agents' presumed cognitive ability is implausible, and that derived optimal behavior is sometimes driven by the fine details of the model rather than the underlying economics. Compte and Postlewaite lay out a tractable way to address these concerns, and to incorporate plausible limitations on agents' sophistication. A central aspect of the proposed methodology is to restrict the strategies assumed available to agents.

Introduction
Part I. Modeling Challenges: 1. Action space
2. Ignorance and uncertainty
3. Observations, perceptions and strategies
4. Strategies and strategy restrictions
5. Knowledge and beliefs
Part II. Legends and Myths: 6. Information aggregation
7. Mechanism design
8. Surplus extraction
9. Folk theorems
10. Comparative statics
Part III. Applications: 11. Auctions
12. Learning
13. Reputation
14. Cooperation
15. Influence
16. Information aggregation in markets
17. Bargaining
18. Attrition
19. Reputation
20. Coordination
21. Ambiguity and other complexity related aversions
Miscellanea
Index.

Subject Areas: Game theory [PBUD], Probability & statistics [PBT], Economic statistics [KCHS], Econometrics [KCH], Economics [KC], Research methods: general [GPS]