RISK, UNCERTAINTY, AND COMPLEXITY

Citation
Al. Norman et Dw. Shimer, RISK, UNCERTAINTY, AND COMPLEXITY, Journal of economic dynamics & control, 18(1), 1994, pp. 231-249
Citations number
23
Categorie Soggetti
Economics
ISSN journal
01651889
Volume
18
Issue
1
Year of publication
1994
Pages
231 - 249
Database
ISI
SICI code
0165-1889(1994)18:1<231:RUAC>2.0.ZU;2-K
Abstract
Complexity theory provides formal procedures for analyzing problem dif ficulty. Frank H. Knight in Risk, Uncertainty and Profit assumed intel ligence is finite and stressed the difficulty of solving problems invo lving uncertainty. In this paper, a risk decision is a stochastic opti mization problem where the parameters and the functional forms require d to determine the optimal decision are known. An uncertain decision i s a stochastic optimization problem where at least one parameter or fu nctional form must be estimated. Using complexity theory, a valid dist inction can be made between risk and uncertainty which is consistent w ith Bayesian statistics. From the perspective of bounded rationality K night's concepts of consolidation and specilization can be reconciled with the Bayesians.