Quantum Structure in Economics: The Ellsberg Paradox

TL;DR

This paper applies quantum probabilistic models to explain the Ellsberg paradox, revealing a quantum conceptual layer in human decision-making that challenges classical economic theories.

Contribution

It introduces a quantum-inspired framework to model ambiguity and contextual risk, successfully applying it to the Ellsberg paradox and highlighting a quantum structure in economic decision processes.

Findings

Quantum models can explain the Ellsberg paradox.

Human decisions involve a quantum conceptual layer.

Classical theories fail to account for observed behaviors.

Abstract

The 'expected utility hypothesis' and 'Savage's Sure-Thing Principle' are violated in real life decisions, as shown by the 'Allais' and 'Ellsberg paradoxes'. The popular explanation in terms of 'ambiguity aversion' is not completely accepted. As a consequence, uncertainty is still problematical in economics. To overcome these difficulties a distinction between 'risk' and 'ambiguity' has been introduced which depends on the existence of a Kolmogorovian probabilistic structure modeling these uncertainties. On the other hand, evidence of everyday life suggests that context plays a fundamental role in human decisions under uncertainty. Moreover, it is well known from physics that any probabilistic structure modeling contextual interactions between entities structurally needs a non-Kolmogorovian framework admitting a quantum-like representation. For this reason, we have recently introduced a notion of 'contextual risk' to mathematically capture situations in which ambiguity occurs. We prove in this paper that the contextual risk approach can be applied to the Ellsberg paradox, and elaborate a sphere model within our 'hidden measurement formalism' which reveals that it is the overall conceptual landscape that is responsible of the disagreement between actual human decisions and the predictions of expected utility theory, which generates the paradox. This result points to the presence of a quantum conceptual layer' in human thought which is superposed to the usually assumed classical logical layer', and conceptually supports the thesis of several authors suggesting the presence of quantum structure in economics and decision theory.