We define rationality and equilibrium when states specify agents’ actions and agents have arbitrary partitions over these states. Although some suggest that this natural modeling step leads to paradox, we show that Bayesian equilibrium is well defined and puzzles can be circumvented. The main problem arises when player j’s partition informs j of i’s move and i knows j’s strategy. Then i’s infer...

This paper considers a two agent model of trade with multiple priors. First, we characterize the existence of an agreeable bet on some event in terms of the set of priors. It is then shown that the existence of an agreeable bet on some event is a strictly stronger condition than the existence of an agreeable trade, whereas the two conditions are equivalent in the standard Bayesian framework. Se...

This paper examines irreversible investment in a project with uncertain returns, when there is an advantage to being the first to invest, and externalities to investing when others also do so. Pre-emption decreases and may even eliminate the option values created by irreversibility and uncertainty. Externalities introduce inefficiencies in investment decisions. Pre-emption and externalities com...

We compare the rationality of choice under risk – utility maximization, stochastic dominance, and expected-utility maximization – of students from one of the best universities in the US and one of the best universities in Africa. The US subjects came nearer to consistency with utility maximization and the dominance principle, but there are no differences between the two samples in consistency w...

Heterogeneity in Risky Choice Behaviour in a Broad Population We analyse risk preferences using an experiment with real incentives in a representative sample of 1,422 Dutch respondents. Our econometric model incorporates four structural parameters that vary with observed and unobserved characteristics: Utility curvature, loss aversion, preferences towards the timing of uncertainty resolution, a...

In this paper, we present the results of two experiments on social sampling, where people make a risky decision after they have sampled the behavior of others who have done exactly the same problem before them. In an individual decision making problem as well as in the takeover game, the simple behavioral rule of imitating the best appears to be a robust description of behavior despite the fact...

Aumann and Brandenburger [Econometrica 63 (1995), 1161 1180.] provide sufficient conditions on the knowledge of the players in a game for their beliefs to constitute a Nash equilibrium. They assume, among other things, mutual knowledge of rationality. By rationality of a player, it is meant that the action chosen by him maximizes his expected utility, given his beliefs. There is, however, no ne...

We address one aspect of the treatment of technical change in the environmental economics literature: how technical change impacts the marginal cost of abatement. We review a selection of papers that employ a variety of representations of technical change, and show that these representations have quite different, and sometimes surprising, effects on the marginal costs of pollution reductions. W...

Other-Regarding Preferences and Leadership Styles We use a laboratory experiment to examine whether and to what extent other-regarding preferences of team leaders influence their leadership style in choice under risk. We find that leaders who prefer efficiency or report high levels of selfishness are more likely to exercise an autocratic leadership style by ignoring preferences of the other tea...

Global climate change presents a classic problem of decision making under uncertainty with learning. We provide stochastic dominance theorems that provide new insights into when abatement and investment into low carbon technology should increase in risk. We show that R&D into low-carbon technologies and near-term abatement are in some sense opposites in terms of risk. Abatement provides insuran...