COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Post Office Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 807

"Knightian Decision Theory: Part 1"

Truman F. Bewley

November 1986

A theory of choice under uncertainty is proposed which removes the completeness assumption from the Anscombe-Aumann formulation of Savage’s theory and introduces an inertia assumption. The inertia assumption is that there is such a thing as the status quo and an alternative is accepted only if it is preferred to the status quo. This theory is one way of giving rigorous expression to Frank Knight’s distinction between risk and uncertainty.

JEL Classification: 026, 022, 511

Keywords: Decision theory, Knight, theory of choice, uncertainty, inertia assumption