This project supports theoretical research on the economic implications of Knightian decision theory, an alternative formulation of choice under uncertainty. Knightian decision theory explains, among other things, how different individuals with the same objective information could attach different subjective probabilities to events of unknown probability. Thus, the theory creates a coherent framework in which individuals with the smae information could have different opinions about choices under uncertainty. The differences of opinion create asymmetries of subjective information among individuals, for they do not know each others' opinions. The research elaborates the view that these asymmetries may help explain important economic phenomena, such as price behavior, layoffs, and strikes. The ultimate goal of the project is to deepen our understanding of general equilibrium and the possible underemployment of resources in general equilibrium. It also provides a deeper theoretical anlysis of possible remedies for the underemployment of resources. Knightian decision theory gives behavioral significance to Frank Knight's distinction between risk and uncertainty. According to these definitions, a gamble is risky if the probabilities of its outcomes are known and it is uncertain if they are not known. The development of Knightian decision theory by this project is an important contribution because this new theory explains a number of different types of decisions that appear irrational according to standard Bayesian decision theory. These include the failure of certain markets to provide insurance, bargaining behavior of labor and management that produces strikes and layoffs and the insensitivity of personal saving to changes in interest rates.
