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19 pages, 4619 KB

Open AccessArticle

Uncertainty and Entrepreneurship: Acknowledging Non-Optimization and Remedying Mismodeling

by Richard J. Arend

Systems 2025, 13(3), 214; https://doi.org/10.3390/systems13030214 - 20 Mar 2025

Cited by 2 | Viewed by 2944

There has been recent proliferation of entrepreneurship theorizing involving the true uncertainty of a system—most often labeled as Knightian. This has been noted in both individual papers and in the main partial theories that attempt to explain entrepreneurial activity more holistically. We [...] Read more.

There has been recent proliferation of entrepreneurship theorizing involving the true uncertainty of a system—most often labeled as Knightian. This has been noted in both individual papers and in the main partial theories that attempt to explain entrepreneurial activity more holistically. We detect a danger in this work involving such true uncertainty—defined by the condition that decisions plagued by it are non-optimizable by every interested party. It is that all the recent theorizing misinterprets that uncertainty in one of two ways: with a logical contradiction (i.e., that the non-optimizable is actually optimizable); or with a misrepresentation (i.e., that an uncertainty consisting of a knowable unknown that can be made known through known means by the time the decision must be made is true). Our concern is that such misinterpretations create unnecessary costs to academics and practitioners who are struggling to define the system they are managing. We explain this concern and its costs, detail the underlying premises, illustrate it with several examples, and then offer various specific directions to improve the theorizing over such uncertainty in entrepreneurship. Full article

(This article belongs to the Section Systems Practice in Social Science)

15 pages, 1785 KB

Open AccessArticle

Why Do Key Decision-Makers Fail to Foresee Extreme ‘Black Swan’ Events? A Case Study of the Pike River Mine Disaster, New Zealand

by Richard John Logan, Robert Y. Cavana, Bronwyn E. Howell and Ian Yeoman

Systems 2024, 12(1), 34; https://doi.org/10.3390/systems12010034 - 19 Jan 2024

Cited by 4 | Viewed by 4825

Abstract

This research addresses the strategic issue of why key decision-makers fail to foresee potential extreme ‘black swan’ events. Following a review of the literature, a conceptual framework is developed that identifies two types of organisational blindness that are reflected in Tetlock’s hedgehog cognitive [...] Read more.

This research addresses the strategic issue of why key decision-makers fail to foresee potential extreme ‘black swan’ events. Following a review of the literature, a conceptual framework is developed that identifies two types of organisational blindness that are reflected in Tetlock’s hedgehog cognitive thinking style, being the oversimplification of uncertainty (e.g., inductive biases) and an unquestioned, top-down, reference narrative. This framework is tested using a case study approach and qualitative analysis of secondary data sources available from the Royal Commission of Inquiry and other published reports following the 2010 methane explosion at the Pike River Coal Ltd.’s mine (Pike) in New Zealand, that killed 29 miners and caused the loss of all funds invested. The results indicate that the combined effect of both blindnesses meant that Pike’s collective intelligence was limited, and for the three key decision-makers at the Pike River mine, some type of extreme ‘black swan’ event was apparently inevitable. This research provides theoretical and practical contributions to the analysis of business and public policy decision-making under uncertainty. Full article

(This article belongs to the Special Issue The Systems Thinking Approach to Strategic Management)

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56 pages, 696 KB

Open AccessArticle

Prices and Taxes in a Ramsey Climate Policy Model under Heterogeneous Beliefs and Ambiguity

by Peter von zur Muehlen

Economies 2022, 10(10), 257; https://doi.org/10.3390/economies10100257 - 17 Oct 2022

Cited by 4 | Viewed by 2851

Abstract

In a Ramsey policy regime, heterogeneity in beliefs about the potential costs of climate change is shown to produce policy ambiguities that alter carbon prices and taxation. Three sources of ambiguity are considered: (i) the private sector is skeptical, with beliefs that are [...] Read more.

In a Ramsey policy regime, heterogeneity in beliefs about the potential costs of climate change is shown to produce policy ambiguities that alter carbon prices and taxation. Three sources of ambiguity are considered: (i) the private sector is skeptical, with beliefs that are unknown to the government, (ii) private agents have pessimistic doubts about the model, or (iii) the policy authority itself does not trust the extant scientific climate model and fears the worst. These three sources of ambiguity give rise to four potential belief regimes characterized by differentials between the government’s and the private sector’s inter-temporal rates of substitutions, with implications for the prices of carbon and capital, framed in terms of distorted Arrow–Debreu pricing theory that establishes an equivalence between the optimal carbon tax and the permit price of an underlying asset—the government-imposed limit on emissions in economies with cap and trade. This paper shows that in most instances, skeptical beliefs and resulting ambiguities justify higher carbon taxes and lower capital taxes to offset the private sector’s increased myopia compared with rational expectations. Conversely, ambiguities created by worst-case fears in either the private sector or in government tend produce forces in the opposite direction. Full article

(This article belongs to the Special Issue Recent Topics in Economic Research – Feature Papers for Cerebrating the 10th Anniversary of Economies)

12 pages, 791 KB

Open AccessArticle

Risk and Uncertainty at the Outbreak of the COVID-19 Pandemic

by Doron Nisani, Mahmoud Qadan and Amit Shelef

Sustainability 2022, 14(14), 8527; https://doi.org/10.3390/su14148527 - 12 Jul 2022

Cited by 10 | Viewed by 3488

Abstract

The classic paradigm in finance maintains that asset returns are paid as a compensation for bearing risk. This study extends the literature and explores whether asset prices are also affected by uncertainty. This research invokes the Expected Utility with Uncertainty Probabilities Model and [...] Read more.

The classic paradigm in finance maintains that asset returns are paid as a compensation for bearing risk. This study extends the literature and explores whether asset prices are also affected by uncertainty. This research invokes the Expected Utility with Uncertainty Probabilities Model and utilizes the natural experiment conditions of the COVID-19 pandemic outbreak, in order to determine whether investors’ behavior during the sharp economic decline was driven by risk, or uncertainty. We limit this research only to the outbreak of the pandemic, since the recovery of the markets suggests investors have adjusted to the unexpected nature of the crisis. Using high-frequency data of the S&P 500 Index, we estimate the investors’ risk and ambiguity aversions, finding that in the pre-pandemic period investors exhibited risk aversion as well as an ambiguity-seeking attitude, while during the pandemic they demonstrated risk- and ambiguity-neutral behavior. The implications of these findings could suggest that in regular times, the financial markets are operated by risk-averse investors with decreasing risk-averse behavior. Full article

(This article belongs to the Special Issue COVID-19 and the Sustainability of Global Economies)

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14 pages, 1527 KB

Open AccessArticle

A Structural Credit Risk Model Driven by the Lévy Process under Knightian Uncertainty

by Hong Huang, Yufu Ning and Xiumei Chen

Symmetry 2022, 14(5), 1041; https://doi.org/10.3390/sym14051041 - 19 May 2022

Cited by 5 | Viewed by 2631

Abstract

The classic credit risk structured model assumes that risky asset values obey geometric Brownian motion. In reality, however, risky asset values are often not a continuous and symmetrical process, but rather they appear to jump and have asymmetric characteristics, such as higher peaks [...] Read more.

The classic credit risk structured model assumes that risky asset values obey geometric Brownian motion. In reality, however, risky asset values are often not a continuous and symmetrical process, but rather they appear to jump and have asymmetric characteristics, such as higher peaks and fat tails. On the other hand, there are real Knight uncertainty risks in financial markets that cannot be measured by a single probability measure. This work examined a structural credit risk model in the Lévy market under Knight uncertainty. Using the Lévy–Laplace exponent, we established dynamic pricing models and obtained intervals of prices for default probability, stock values, and bond values of enterprise, respectively. In particular, we also proved the explicit solutions for the three value processes above when the jump process is assumed to follow a log-normal distribution. Finally, the important impacts of Knightian uncertainty on the pricing of default probability and stock values of enterprise were studied through numerical analysis. The results showed that the default probability of enterprise, the stock values, and bond values were no longer a certain value, but an interval under Knightian uncertainty. In addition, the interval changed continuously with the increase in Knightian uncertainty. This result better reflected the impact of different market sentiments on the equilibrium value of assets, and expanded decision-making flexibility for investors. Full article

(This article belongs to the Special Issue Fuzzy Set Theory and Uncertainty Theory)

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13 pages, 1197 KB

Open AccessArticle

Expectations Concordance and Stock Market Volatility: Knightian Uncertainty in the Year of the Pandemic

by Roman Frydman and Nicholas Mangee

J. Risk Financial Manag. 2021, 14(11), 521; https://doi.org/10.3390/jrfm14110521 - 1 Nov 2021

Cited by 2 | Viewed by 3107

Abstract

This study introduces a novel index based on expectations concordance for explaining stock-price volatility when novel events that are each somewhat unique cause unforeseeable change and Knightian uncertainty in the process driving outcomes. Expectations concordance measures the degree to which KU events are [...] Read more.

This study introduces a novel index based on expectations concordance for explaining stock-price volatility when novel events that are each somewhat unique cause unforeseeable change and Knightian uncertainty in the process driving outcomes. Expectations concordance measures the degree to which KU events are associated with directionally similar expectations of future returns. Narrative analytics of daily news reports allow for the assessment of bullish versus bearish views in the stock market. Increases in expectations concordance across all KU events results in reinforcing effects and an increase in stock market volatility. Lower expectations concordance produces a stabilizing effect wherein the offsetting views reduce market volatility. The empirical findings hold for ex post and ex ante measures of volatility and for OLS and GARCH estimates. Full article

(This article belongs to the Special Issue Infectious Disease Outbreaks, Uncertainties, Firms, and Financial Markets)

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26 pages, 350 KB

Open AccessArticle

Forward Rate Bias in Developed and Developing Countries: More Risky Not Less Rational

by Michael D. Goldberg, Olesia Kozlova and Deniz Ozabaci

Econometrics 2020, 8(4), 43; https://doi.org/10.3390/econometrics8040043 - 2 Dec 2020

Cited by 2 | Viewed by 4537

Abstract

This paper examines the stability of the Bilson–Fama regression for a panel of 55 developed and developing countries. We find multiple break points for nearly every country in our panel. Subperiod estimates of the slope coefficient show a negative bias during some time [...] Read more.

This paper examines the stability of the Bilson–Fama regression for a panel of 55 developed and developing countries. We find multiple break points for nearly every country in our panel. Subperiod estimates of the slope coefficient show a negative bias during some time periods and a positive bias during other time periods in nearly every country. The subperiod biases display two key patterns that shed light on the literature’s linear regression findings. The results point toward the importance of risk in currency markets. We find that risk is greater for developed country markets. The evidence undercuts the widespread view that currency returns are predictable or that developed country markets are less rational. Full article

(This article belongs to the Special Issue Celebrated Econometricians: Katarina Juselius and Søren Johansen)

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21 pages, 1088 KB

Open AccessArticle

Short-Term Expectation Formation Versus Long-Term Equilibrium Conditions: The Danish Housing Market

by Andreas Hetland and Simon Hetland

Econometrics 2017, 5(3), 40; https://doi.org/10.3390/econometrics5030040 - 4 Sep 2017

Cited by 3 | Viewed by 9014

Abstract

The primary contribution of this paper is to establish that the long-swings behavior observed in the market price of Danish housing since the 1970s can be understood by studying the interplay between short-term expectation formation and long-run equilibrium conditions. We introduce an asset [...] Read more.

The primary contribution of this paper is to establish that the long-swings behavior observed in the market price of Danish housing since the 1970s can be understood by studying the interplay between short-term expectation formation and long-run equilibrium conditions. We introduce an asset market model for housing based on uncertainty rather than risk, which under mild assumptions allows for other forms of forecasting behavior than rational expectations. We test the theory via an I(2) cointegrated VAR model and find that the long-run equilibrium for the housing price corresponds closely to the predictions from the theoretical framework. Additionally, we corroborate previous findings that housing markets are well characterized by short-term momentum forecasting behavior. Our conclusions have wider relevance, since housing prices play a role in the wider Danish economy, and other developed economies, through wealth effects. Full article

(This article belongs to the Special Issue Recent Developments in Cointegration)

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