Utility and Probability pp 280-294 | Cite as

# Uncertainty

## Abstract

Nothing is more certain than the prevalence of uncertainty about the consequences of any economic decision. It is therefore entirely appropriate that uncertainty has been the subject of a large literature that grew out of important work in the early 1950s, and is still flourishing, as testified by the number of recent surveys and books such as Balch, McFadden and Wu (1974), Diamond and Rothschild (1978), Hirshleifer and Riley (1979), Lippman and McCall (1981), Fishburn (1982), Schoemaker (1982), Sinn ( 1983). No attempt will be made here to provide a comprehensive new survey. Rather, the devices of state contingent consequence functions and state preferences will be explained, and various types of uncertainty categorized. Following the pioneering work of Ramsey (1926), Savage (1954), and Anscombe and Aumann (1963) in particular, I shall discuss decision theory and when uncertainty can be described by subjective probabilities, based on an analysis of decision trees in the spirit of Raiffa (1968). While uncertainty *per se* can be largely treated through devices such as Debreu (1959) state contingent commodity contracts, the problems posed by asymmetric information and the lack of common knowledge are much more fundamental and intractable.

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