The Economics of Radical Uncertainty

Abstract: In situations of what we now describe as radical uncertainty, the core model of agent behaviour, of rational autonomous agents with stable preferences, is not useful. Instead, a different principle, in which the decisions of an agent are based directly on the decisions and strategies of other agents, is offered as a relevant core model. Preferences are not stable, but evolve. It is not a special case in such circumstances, but the general one. The author provides empirical evidence to suggest that as a description of behaviour in the modern world, economic rationality is applicable in a declining number of situations. He discusses models drawn from the modern literature on cultural evolution in which imitation of others is the basic strategy, and suggests a heuristic way of classifying situations in which the different models are relevant. The key point is that in situations where radical uncertainty is present, we require theoretical ‘null’ models of agent behaviour which are different from those of economic rationality. Under uncertainty, fundamentally different behavioural rules are ‘rational’. The author gives an example of a very simple pure sentiment model of the business cycle, in which agents use very simple heuristic decision rules. It is nevertheless capable of approximating a number of deep features of output growth over the cycle.

Location
Deutsche Nationalbibliothek Frankfurt am Main
Extent
Online-Ressource
Language
Englisch

Bibliographic citation
The Economics of Radical Uncertainty ; volume:9 ; number:1 ; year:2015 ; extent:21
Economics / Journal articles. Journal articles ; 9, Heft 1 (2015) (gesamt 21)

Creator

DOI
10.5018/economics-ejournal.ja.2015-41
URN
urn:nbn:de:101:1-2412130956007.629624821216
Rights
Open Access; Der Zugriff auf das Objekt ist unbeschränkt möglich.
Last update
15.08.2025, 7:23 AM CEST

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