Please use this identifier to cite or link to this item:
al- Najjar, Nabil I.
Weinstein, Jonathan
Year of Publication: 
Series/Report no.: 
Reihe Ökonomie / Economics Series, Institut für Höhere Studien (IHS) 300
A long tradition suggests a fundamental distinction between situations of risk, where true objective probabilities are known, and unmeasurable uncertainties where no such probabilities are given. This distinction can be captured in a Bayesian model where uncertainty is represented by the agent's subjective belief over the parameter governing future income streams. Whether uncertainty reduces to ordinary risk depends on the agent's ability to smooth consumption. Uncertainty can have a major behavioral and economic impact, including precautionary behavior that may appear overly conservative to an outside observer. We argue that one of the main characteristics of uncertain beliefs is that they are not empirical, in the sense that they cannot be objectively tested to determine whether they are right or wrong. This can confound empirical methods that assume rational expectations.
Knightian uncertainty
consumption smoothing
uncertainty premium
rational expectations
Document Type: 
Working Paper

Files in This Item:
322.78 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.