Risk, uncertainty and hidden information

Stephen Morris

Research output: Contribution to journalArticle

20 Scopus citations

Abstract

People are less willing to accept bets about an event when they do not know the true probability of that event. Such "uncertainty aversion" has been used to explain certain economic phenomena. This paper considers how far standard private information explanations (with strategic decisions to accept bets) can go in explaining phenomena attributed to uncertainty aversion. This paper shows that if two individuals have different prior beliefs about some event, and two sided private information, then each individual's willingness to bet will exhibit a bid ask spread property. Each individual is prepared to bet for the event, at sufficiently favorable odds, and against, at sufficiently favorable odds, but there is an intermediate range of odds where each individual is not prepared to bet either way. This is only true if signals are distributed continuously and sufficiently smoothly. It is not true, for example, in a finite signal model.

Original languageEnglish (US)
Pages (from-to)235-269
Number of pages35
JournalTheory and Decision
Volume42
Issue number3
DOIs
StatePublished - Jan 1 1997

All Science Journal Classification (ASJC) codes

  • Decision Sciences(all)
  • Developmental and Educational Psychology
  • Arts and Humanities (miscellaneous)
  • Applied Psychology
  • Social Sciences(all)
  • Economics, Econometrics and Finance(all)
  • Computer Science Applications

Keywords

  • Asymmetric information
  • Subjective probability
  • Uncertainty aversion
  • Willingness to bet

Fingerprint Dive into the research topics of 'Risk, uncertainty and hidden information'. Together they form a unique fingerprint.

  • Cite this