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Decision Making under Uncertainty

Seminar

taught by Prof. Dr. Eva Lütkebohmert-Holtz and Dr. Lorenz Hartmann

 

Content              

This seminar is on the theory of decision making under uncertainty. We cover both risk and non-calculable risk (ambiguity). We will discuss the most important models in decision theory such as expected utility theory, prospect theory, subjective expected utility theory and maxmin expected utility theory. We focus on the axiomatic foundations of these models as well as how these models can be applied and empirically tested. We discuss famous decision-theoretic “paradoxes” such as the St. Petersburg Paradox, the Ellsberg Paradox and the Allais Paradox. We discuss how these paradoxes can be resolved with the introduced models. Towards the end of the course we study how models on ambiguity can be applied to strategic interaction (games) and how this can explain empirically observed deviations from the Nash Equilibrium prediction.

Overall this seminar is theoretical, however a main focus will also be on examples and applications. Required knowledge is a solid understanding of the basic principles of Microeconomics. A more pronounced background in Economics and/or Mathematics is helpful but not required. The student should be interested and curious about how human decision making can be modelled and tested.

The following topics are the main building blocks of the seminar:

 

1.     What is Decision Theory? We discuss the concepts of states of the world, consequences, acts and preferences as well as the role of axioms in decision theory. We illustrate this by means of examples.

2.     Decision making under risk: expected utility theory, prospect theory, St. Petersburg Paradox, Allais Paradox.

3.     De Finetti's approach to decision making under uncertainty and its relationship to finance and no arbitrage arguments.

4.     “The crowning glory of choice theory”: Savage's famous subjective expected utility theory.

5.     Decision making under ambiguity: the Ellsberg Paradox, Choquet expected utility theory and Maxmin expected utility theory.

6.     Ambiguous games: explaining deviations from Nash equilibrium with ambiguity.

                                  
Dates

 Fridays 12-6pm, R1 Peterhof

January 10th, 17th, 24th, 31st and February 07th, 14th, 2020.

 

First Meeting

Wednesday, October 23rd, 4-6pm, R 2 Peterhof

Introduction

 

Language

 English

 

Prerequisites

Advanced Microeconomics I

 

ECTS

6

 

Exam

Every student will give a presentation and submit a paper on their assigned topic. This is a 6 ECTS course.

 

ILIAS

Course materials will be available on ILIAS. The password necessary to register for the course on ILIAS will be given in the first meeting!

 

Credit

The seminar is open to M.Sc. Economics, M.Sc. Mathematics, M.Sc. VWL (Spezialisierungsbereiche "Accounting, Finance and Taxation" und "Empirical Economics") and diploma students in their advanced study (economic theory) period.

 

Registration

This course is primarily intended for students in the second year of the master program. Pre-registration is required. Interested students are asked to register via email to lorenz.hartmann@vwl.uni-freiburg.de until October 13th, 2019.

 

Applications should indicate:

  • the course of studies,
  • the number of terms,
  • and should include a recent transcript.

 

This seminar can be dropped without penalty until October 28th, 2019. Thereafter, withdrawal will count as a failed examination attempt!

 

Main References  

Wakker, Peter P. Prospect theory: For risk and ambiguity. Cambridge university press, 2010.

 

Gilboa, Itzhak. Theory of decision under uncertainty. Vol. 1. Cambridge: Cambridge university press, 2009.

 

Goeree, Jacob K., and Charles A. Holt. "Ten little treasures of game theory and ten intuitive contradictions." American Economic Review %91.5 (2001): 1402-1422.

 

Eichberger, Jürgen, and David Kelsey. "Are the treasures of game theory ambiguous?." Economic Theory 48.2-3 (2011): 313-339.

 

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