SFB 303 Discussion Paper No. A - 233

Author: Bewley, Truman F.
Title: Market Innovation and Entrepreneurship: A Knightian View
Abstract: Stimulated by Frank Knight's work, Risk, Uncertainty and Profit, a theory of innovation is presented using what is termed Knightian decision theory. This theory includes a concept of uncertainty aversion. Uncertainty aversion makes people reluctant to undertake new unevaluatable risks. This aversion is compounded when individuals are obliged to cooperate in undertaking a risk. The theory leads naturally to the conclusion that innovation in business would be the natural domain of individual investors with unusually low levels of uncertainty aversion. Uncertainty aversion would also make it difficult to innovate new markets for insurance of unevaluatable risks, for the success of a new market requires that many people overcome their aversion to uncertainty and enter the market.
Keywords: Nonparametric regression, kernel regression, bandwidth selection, bias correction, mean squared error
JEL-Classification-Number: 423
Creation-Date: April 1989
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