Market Uncertainty and the Process of Belief Formation

Abstract

Economists have frequently participated in philosophical, statistical, and psychological debates on the foundations of probability. Recent examples (e.g., Allais, 1983) could be added to the names more traditionally cited in this respect. But as economists, i.e., as scientists making use of arguments grounded upon the specific tools of economic theory, they have said relatively little on the subject. French physiocrats, for example, maintained that probability should play a central role in the human and social sciences, but they failed to make use of the economic concepts underlying their analyses to explain in which way it should do so. Thus, they did not provide any economic foundation of probability. The same observation holds regarding Francis Y. Edgeworth when, a century later, he simply noted that banking was basically a business in probability.

This research has been supported by a research contract of the Commissariat Général du Plan (n°16/1990). Helpful comments by J-P. Auray, D. Bouysou, M. Cohen, J-Y Jaffray, V. Dumitru, and J-L. Rullière on an earlier version of this article, as well as help for the figures from C. Sarazin, are gratefully acknowledged. All remaining errors are the author’s responsibility.