Theories of Choice under Ignorance and Uncertainty.

In this paper, Knight's distinction between risk and uncertainty, and its significance for economic analysis are examined. The paper consists of a survey of some recent developments on the theory of choice under uncertainty and some applications of these theories to problems for which Bayesian Decision Theory has not proved entirely satisfactory. Two problems are examined in detail. The first is that of finance and insurance and the second is that of risk-taking behavior with special emphasis on lotteries. Copyright 1992 by Blackwell Publishers Ltd