How is non-knowledge represented in economic theory?

TL;DR

This paper reviews how economic theory has historically formalized non-knowledge, such as ambiguity and unawareness, highlighting two main approaches and their challenges in representing uncertainty.

Contribution

It provides a comprehensive overview of formal methods used to model non-knowledge in economic decision-making, comparing state space and menu-based approaches.

Findings

Two main formal approaches identified: state space and menu-based models.

Challenges in formalizing non-knowledge include capturing agents' subjective uncertainty.

Historical development shows evolving understanding of ambiguity and unawareness.

Abstract

In this article, we address the question of how non-knowledge about future events that influence economic agents' decisions in choice settings has been formally represented in economic theory up to date. To position our discussion within the ongoing debate on uncertainty, we provide a brief review of historical developments in economic theory and decision theory on the description of economic agents' choice behaviour under conditions of uncertainty, understood as either (i) ambiguity, or (ii) unawareness. Accordingly, we identify and discuss two approaches to the formalisation of non-knowledge: one based on decision-making in the context of a state space representing the exogenous world, as in Savage's axiomatisation and some successor concepts (ambiguity as situations with unknown probabilities), and one based on decision-making over a set of menus of potential future opportunities, providing the possibility of derivation of agents' subjective state spaces (unawareness as situation with imperfect subjective knowledge of all future events possible). We also discuss impeding challenges of the formalisation of non-knowledge.