Professor Hiroyuki Ozaki of Keio University has studied "risk and uncertainty" and is currently leading this field.
As a background to this research area, in 1921, Frank Knight distinguished two types of uncertainty.
My research topic is Knightian uncertainty. and here Knight is the name of very famous economist who wrote a book about uncertainty.
He distinguished two types of uncertainty, first type of uncertainty is uncertainty where the situation is summarized by the unique probability distribution, so people know that the probability correctly. And second situation where uncertainty happens is that people are very unsure about the real wolrd, so people don't even probability itself. So, these two situations are quite different, and Knight distinguished these two types of uncertainty and emphasized that the distinction is important.
But Savage, Leonard J. Savage developed some theory. There, people behave as if people know the single probability distribution. and by using probability people decides. People will make decisions.
And by Savage theory the distinction made by Knight is not important because we can have a single probability, single distribution. But….
In 1961, Ellsberg criticized Savage's theory by conducting a well-known experiment known as Ellsberg's paradox.
Nevertheless also Ellsberg pointed out that the distinction made by Frank Knight is very, very important, but Savage's tradition of assuming the single probability distribution has continued
For more than 20 years, Ellsberg's result has been almost ignored,
Around 20 years later, during the early 1980s, Gilboa and Schmeidler promulgated a new theory that very much improved on Savage's work. They did not assume the existence of a single probability distribution and succeeded in explaining Ellsberg's paradox.
Gilboa and Schmeidler assume that people do not have any single probability which explain everything. So, Gilboa and Schmeidler model can replace Savage's model by assuming multiple probability rather than single unique probability distribution.
Nishimura and Ozaki applied their theory to explain certain empirical economic phenomena. In 2004, they showed that the rate at which people are leaving their jobs decreases as the real data show when Knightian uncertainty increases, although it is theoretically well-known that in a traditional risk sense, the rate must counter-intuitively increase when uncertainty increases.
For example people's rate of leaving their jobs is decreasing over these days, that is people stick to their jobs instead of quitting their jobs,and in traditional economic theory assuming the unique probability distribution, if uncertainty increase then the theory says that people are easy to leave their jobs, so this is contradicting to real data.
but if we employ Gilboa and Schmeidler's theory to explain this kind of situation, then we can show that if the uncertainty increase in the sense of Knight, then people's rate of leaving their jobs certainly decreas. Therefore our result, theoretical result is explaining the real data very nicely.
Nishimura and Ozaki also revealed a drastic difference with respect to the implications of learning. People actually learn if they know the probability in the beginning. This is a popular story. However, if people start learning without knowing the exact probability distribution, through learning they will know even less about the truth!
And second interesting research results by Nishimura Ozaki is that "if people start learning, then do people go to the truth or not?".
If people know the true probability uniquely then traditional theory says if people learn more and more than they reach as close as possible to the truth of the world.
But if people are uncertain in the sense of Knight and if people learn more and more, then they may get more upset or people may get more uncertain about the true world because of non-uniqueness of the true probability.
though this is very interesting result.
and these result including others will be summarized by one whole book and will be published by publishing company in near future.
It is Nishimura Ozaki's book entitled Economics of Pessimism and Optimism, and this is about national uncertainty and it should be interesting and you should buy it.
Economics of Pessimism and Optimism
Published by Springer
Book written by Nishimura and Ozaki
(This video was recorded in March, 2017)
