Knightian decision theory. I. (Q1862738)

The theme of this paper is the theory of choice under uncertainty. The author suggests one way of giving a rigorous expression to the F. Knight's distinction between risk and uncertainty. F. Knight (1921) based a theory of profit and entrepreneurship on the idea that the function of the entrepreneur is to undertake investments with uncertain outcome. The author's basic idea is to drop the completeness assumption from Savage's (1954) framework and to add an assumption of inertia. The central problem of this paper is to make the inertia assumption precise and to defend its rationality. This assumption means that there is such a thing as the status quo and an alternative is accepted only if it is preferred to the status quo. The author presents three different versions for a more precise definition of inertia.