Summary of the project:
The project investigates applications of a recent approach to decision making under uncertainty. The main idea is that individuals' preferences do not satisfy the completeness axiom. Then, individuals use a set of probability distributions instead of a single probability to compute expected utilities. The size of this set, how many distributions each individual considers, reflects different degrees of confidence in understanding the environment. This framework is important for two reasons. One can ask whether some conclusions of existing models are robust when economic agents lack confidence in beliefs. Second, a novel and realistic description of heterogeneity across individuals is possible. There is no a priori reason to assume lack of confidence is identical across individuals; some agents may have revious experience of a particular situation while others do not. This experience is reflected by higher confidence in beliefs Other agents may not have this experience to help them evaluate uncertain situations. The objective of the research is to provide a rigorous answer to the following questions. What motivates an entrepreneur's decision to invest in a particular project? What does this decision imply for economic fluctuations? How doe the monetary authority affect the understanding the public has of the economy?