Applying Stated Preferences in the Presence of Uncertainty
Chapter 2: Uncertainty and Stated Preference Techniques: A Conceptual Overview
2.1 INTRODUCTION The previous chapter described the background to this book and outlined its main objectives. This chapter presents a discussion of relevant economics and psychology concepts to consolidate the background. The next section reviews definitions of uncertainty from the economics literature. Section 2.3 explains the economic underpinnings of SP techniques and develops a set of operational definitions of uncertainty in the SP context. Section 2.4 presents a review of the theories of decision making under uncertainty. Section 2.5 discusses cognitive psychology theories to develop the concept of preference uncertainty. Section 2.6 concludes the chapter. 2.2 DEFINITION OF UNCERTAINTY Uncertainty is a multidisciplinary concept. Although the general notion of uncertainty is similar across disciplines, its operational definition varies substantially. The economics literature defines uncertainty as events with imprecise probabilities. Knight (1921) and Keynes (1921) were the first to emphasize the difference between precise and imprecise probabilities. Keynes (1921) distinguished between probability and weight of argument. He argued that even if two probabilities are equal in degree, the decision maker chooses a course of action depending on the extent and strength of the evidence supporting each probability. Knight (1921), in a similar spirit to Keynes (1921), provided a more explicit distinction using the terms ‘risk’ and ‘uncertainty’. He distinguished between risk and uncertainty depending on the level of knowledge about the probabilities of outcomes of an event. Risk is characterized by the presence of a unique, additive and fully reliable probability distribution function. Uncertainty refers to a situation in which probabilities...
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