Gambling Under Unknown Probabilities as Proxy for Real World Decisions Under Uncertainty

Abstract

Abstract The subject of decisions under uncertainty about future events, if lacking sufficient theory or data to make confident probability assessments, poses a challenge for any quantitative analysis. This article suggests one way to first look at this subject. We give elementary examples within a framework for studying decisions under uncertainty where probabilities are only roughly known. The framework, in gambling terms, is that the size of a bet is proportional to the gambler’s perceived advantage based on their perceived probability, and their accuracy in estimating true probabilities is measured by mean-squared-error. Within this framework one can study the cost of estimation errors, and seek to formalize the “obvious” notion that in competitive interactions between agents whose actions depend on their perceived probabilities, those who are more accurate at estimating probabilities will generally be more successful than those who are less accurate. This article is an extended version of the Brouwer Medal talk at the 2021 Nederlands Mathematisch Congres.