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Definition: If outcomes will occur with a probability that cannot even be estimated, the decisionmaker faces uncertainty.

This meaning to uncertainty is attributed to Frank Knight, and is sometimes referred to as Knightian uncertainty.

The decisionmaker can apply game theory even in such a circumstance, e.g. the choice of a dominant strategy.

Kreps (1988), p 31, writes that three standard ways of modeling choices made under conditions of uncertainty are with von Neumann-Morgenstern expected utility over objective uncertainty, the Savage axioms for modeling subjective uncertainty, and the Anscombe-Aumann theory which is a middle course between them.

A recent ad for a new book edited by Haim Levy (Stochastic Dominance: Investment Decision Making under Uncertainty) considers three ways of modeling investment choices under uncertainty: by tradeoffs between mean and variance, by choices made by stochastic dominance, and non-expected utility approaches using prospect theory.


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