States, models and unitary equivalence I: Representation theorems and analogical reasoning

Title:

States, models and unitary equivalence I: Representation theorems and analogical reasoning

Author(s):

Amarante, Massimiliano

Date:

2004

Type:

Working papers

Department:

Economics

Permanent URL:

http://hdl.handle.net/10022/AC:P:470

Series:

Department of Economics Discussion Papers

Part Number:

040510

Abstract:

I show that virtually any model of decision making under uncertainty is associated to a certain structure. This contains three fundamental ingredients: (1) The domain of the acts; (2) Another set, which is called the set of models for the decision maker; and (3) The decision maker's information about the set of models (an algebra of subsets of the set of models). A consequence of this finding is that that the decision maker's choices can be viewed as the outcome of a twostage process. First, the set of acts is mapped into a system of hypothetical bets on the set of models. Then, the latter are ranked by the decision maker. I show that this procedure can be thought of as describing a general form of analogical reasoning. I also observe that the appearance of two different sets implies that the decision maker is uncertain about two different objects and that he may receive information about any of them. In particular, information about the set of models affects the decision maker's ranking of the available alternatives. In the sequel to this paper, I show that certain natural information structures lead to an inherent inability of assigning probabilities on the domain of the acts. In a formal sense, their properties describe the idea of Knightian Uncertainty.

Subject(s):

Economic theory
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