Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/147298 
Year of Publication: 
2016
Citation: 
[Journal:] Economics: The Open-Access, Open-Assessment E-Journal [ISSN:] 1864-6042 [Volume:] 10 [Issue:] 2016-24 [Publisher:] Kiel Institute for the World Economy (IfW) [Place:] Kiel [Year:] 2016 [Pages:] 1-30
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
Abstract: 
Uncertainty in economics is generated by 'nature' but also by the model we use to 'produce the future'. The production of the future comprises besides the allocation of resources on different instruments (technologies, financial products) also the design of the instruments. Specialization and diversification considerations point to the advantages of targeting instruments to a rich set of possible future states. But, if a rich state space comes with unreliable probability measures, the actions based on such a set will be unreliable too. The proliferation of financial products is a salient example. This paper argues that an appropriate model for dealing with uncertainty keeps the knowledge required by the model from its user in line with the available knowledge. In particular, it proposes to order state spaces by their 'granularity' and 'coverage'. Appropriate upper bounds are derived for these characteristics. A practical implication of the presented approach would be to limit financial product innovation.
Subjects: 
Limited knowledge
robustness
reliable information
risk and uncertainty
crisis
JEL: 
D80
D81
D83
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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