Abstract
This paper makes endogenous the probability assignment of an economic agent in a familiar two-period finance model by basing the probability assignment upon available information. The Principle of Maximum Entropy (PME) reduces an economic decision made under uncertainty to a decision made under risk. The PME accomplishes this because the necessary conditions for a probability distribution to achieve maximum entropy, given certain information, are equivalent to the conditions characterizing a distribution for which the information forms a sufficient statistic of fixed dimension.
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© 1991 Springer Science+Business Media Dordrecht
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Grandy, C. (1991). The Principle of Maximum Entropy and the Difference between Risk and Uncertainty. In: Grandy, W.T., Schick, L.H. (eds) Maximum Entropy and Bayesian Methods. Fundamental Theories of Physics, vol 43. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-3460-6_4
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DOI: https://doi.org/10.1007/978-94-011-3460-6_4
Publisher Name: Springer, Dordrecht
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