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3. Linear decision models in the face of risk and uncertainty
So far, we have only considered the deterministic framework, i.e. situations in which the future is certain. Since the work of Frank Knight in 1921, the environment is said to be risky if the agent making the decision knows the probability distributions of the various possible states of the world. If these probabilities are unknown, the environment is said to be uncertain.
3.1 Information structure
When the environment is not deterministic, several states of nature are likely to occur, and the set of these states of nature is denoted Ω. Consider the case where Ω = {ω 1 , ω 2 , ω 3 } and where each state of the world corresponds...
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Linear decision models in the face of risk and uncertainty
Non-linear decision models in the face of risk and uncertainty
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