Two Dimensions of Subjective Uncertainty

craig fox

Craig Fox


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Date: October 14, 2015


In my talk I will argue that people maintain dual intuitions about the nature of uncertainty, and these intuitions can have a critical impact on judgments and choices. In some cases people attribute uncertainty to deficiencies in their knowledge, information, and/or mental model of relevant events (knowable or “epistemic” uncertainty); in other cases people attribute uncertainty to causal systems in the world whose behavior is largely stochastic (random or “aleatory” uncertainty). I will briefly review evidence of this distinction from prior literature and then present a series of novel empirical studies. First, I will show that epistemic (knowable) uncertainty is marked in natural language by statements such as “I am 80% sure that…” or “I am reasonably confident that…” whereas aleatory (random) uncertainty is marked by statements such as “I think there is an 80% chance that…” or “I believe there is a high probability that…”. Second, I will show that people reliably distinguish between epistemic and aleatory uncertainty in their rating of events, and forecasters are assigned more credit/blame for correct/incorrect predictions when events are seen as more epistemic (knowable) whereas they are seen as more lucky/unlucky when events are seen as more aleatory (random). Moreover, people sometimes make self-serving attributions concerning the nature of uncertainty. Third, I’ll show that people tend to make more extreme probability judgments (and therefore exhibit greater overconfidence) when assessing events that they see as more epistemic (knowable) or less aleatory (random). Finally, I’ll show that investing behaviors (e.g., time horizon, diversification, advice-seeking) are associated with individual differences in perceptions of market uncertainty. I’ll conclude with a brief discussion of further implications and directions for future research.

Created: Thursday, October 15th, 2015