Skip to main content
SpringerLink
Log in
Book cover

Encyclopedia of Law and Economics pp 211–218Cite as

Choice Under Risk and Uncertainty

  • Reference work entry
  • First Online:

  • 69 Accesses

Definition

This entry outlines what is meant by decision-making under risk and uncertainty. It illustrates the model of expected utility, its properties, and the Allais paradox as the main violation of the model. It describes the subjective expected utility model of decision under uncertainty, and the Ellsberg paradox as an example of the Knight’s approach to uncertainty.

Introduction

In real economic life, many decisions are taken under risk and uncertainty, for example, investment decisions, decisions about consumption through time, buying and selling insurance, investment in new industries and countries, choosing new technologies, stock market purchases, and sales.

The literature on decision-making under risk and uncertainty can be divided in: (1) the literature concerning decision-making under risk, which includes: (a) the expected utility model (EU) and its axiomatizations (Bernoulli 1954; von Neumann and Morgenstern 1947); (b) the criticisms to the EU model (Allais 1953) and its...

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   819.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD   1,099.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

References

  • Allais M (1953) Fondements d’une théorie positive des choix comportant un risqué et critique des postulates et axioms de l’école Américaine. Econometrica 21(4):503–546

    Article  Google Scholar 

  • Allais M, Hagen O (eds) (1979) Expected utility hypothesis and the Allais paradox. D. Reidel, Dordrecht

    Google Scholar 

  • Arrow K (1964) The role of securities in the optimal allocation of risk-bearing. Rev Econ Stud 31:91–96

    Article  Google Scholar 

  • Bernoulli D (1954) Specimen theoriae novae de mensura sortis. (Commentarii Academiae Scientiarum Imperialis Petropolitanae, 1738). Econometrica 22:23–26. (Trans. as Exposition of a new theory on the measurement of risk)

    Article  Google Scholar 

  • Camerer CE, Weber M (1992) Recent developments in modeling preferences: uncertainty and ambiguity. J Risk Uncertain 5(4):325–370

    Article  Google Scholar 

  • de Finetti B (1937) La prévision: ses lois logiques, ses sources subjectives. Ann l H Poincaré 7(1):1–68

    Google Scholar 

  • Ellsberg D (1961) Risk ambiguity and the Savage axioms. Q J Econ 75:643–669

    Article  Google Scholar 

  • Gilboa I, Marinacci M (2016) Ambiguity and the Bayesian paradigm. In: Arló-Costa H, Hendricks VF, van Benthem J (eds) Readings in formal epistemology. Springer, New York

    Google Scholar 

  • Kahneman D, Tversky A (1979) Prospect theory: an analysis of decision under risk. Econometrica 47:273–291

    Article  Google Scholar 

  • Keynes J,M (1921) A treatise on probability. McMillan, London

    Google Scholar 

  • Knight F (1921) Risk, uncertainty and profit. Houghton-Mifflin, Boston

    Google Scholar 

  • Loomes G, Sugden R (1982) Regret theory: an alternative theory of rational choice under uncertainty. Econ J 92:805–824

    Article  Google Scholar 

  • MacCrimmon KR, Larsson S (1979) Utility theory: axioms versus ‘paradoxes’. In: Allais M, Hagen O (eds) Expected utility hypothesis and the Allais paradox. D. Reidel, Dordrecht

    Google Scholar 

  • Machina M (1987) Choice under uncertainty: problems solved and unsolved. J Econ Perspect 1(1):121–154

    Article  Google Scholar 

  • Machina M, Siniscalchi M (2014) Ambiguity and ambiguity aversion. In: Machina M, Viscusi K (eds) The handbook of the economics of risk and uncertainty. North-Holland, Oxford

    Google Scholar 

  • Marschak J (1950) Rational behavior, uncertain prospects, and measurable utility. Econometrica 18:111–141

    Article  Google Scholar 

  • Pratt JW (1964) Risk aversion in the small and in the large. Econometrica 32:122–136

    Article  Google Scholar 

  • Quiggin J (1982) A theory of anticipated utility. J Econ Behav Organ 3:323–343

    Article  Google Scholar 

  • Quiggin J (1993) Generalized expected utility theory. Kluwer, Dordrecht

    Book  Google Scholar 

  • Raiffa H (1968) Decision analysis: introductory lectures on choices under uncertainty. Addison-Wesley, Reading

    Google Scholar 

  • Ramsey FP (1931) Truth and probability. In: The foundations of mathematics and other logical essays. Harcourt, Brace, New York

    Google Scholar 

  • Savage L (1954) The foundations of Statistics. Wiley, New York

    Google Scholar 

  • Schmeidler D (1989) Subjective probability and expected utility without additivity. Econometrica 57(3):571–587

    Article  Google Scholar 

  • Starmer C (2000) Developments in non-expected utility theory. J Econ Lit 38:332–382

    Article  Google Scholar 

  • Starmer C, Sugden R (1989) Violations of the independence Axiom in common ratio problems: an experimental test of some competing hypotheses. Ann Oper Res 19(1):79–102

    Article  Google Scholar 

  • Trautmann ST, Vieider FM, Wakker PP (2008) Causes of ambiguity aversion: known versus unknown preferences. J Risk Uncertain 36(3):225–243

    Article  Google Scholar 

  • Tversky A, Kahneman D (1992) Advances in prospect theory: cumulative representation of uncertainty. J Risk Uncertain 5:297–323

    Article  Google Scholar 

  • von Neumann J, Morgenstern O (1947) Theory of games and economic behaviour, 2nd edn. Princeton University Press, Princeton

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. DiGSPES, University of Eastern Piedmont, Alessandria, Italy

    Gianna Lotito

  2. ESOMAS, University of Turin, Turin, Italy

    Anna Maffioletti

Authors
  1. Gianna Lotito
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Anna Maffioletti
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Gianna Lotito .

Editor information

Editors and Affiliations

  1. MRE and University of Montpellier, Montpellier, France

    Alain Marciano

  2. Faculté d’Economie, Université de Montpellier and LAMETA-UMR CNRS, Montpellier, France

    Alain Marciano

  3. DiGSPES, University of Eastern Piedmont, Alessandria, Italy

    Giovanni Battista Ramello

  4. IEL, Torino, Italy

    Giovanni Battista Ramello

Rights and permissions

Reprints and permissions

Copyright information

© 2019 Springer Science+Business Media, LLC, part of Springer Nature

About this entry

Check for updates. Verify currency and authenticity via CrossMark

Cite this entry

Lotito, G., Maffioletti, A. (2019). Choice Under Risk and Uncertainty. In: Marciano, A., Ramello, G.B. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7753-2_757

Download citation

Publish with us

Policies and ethics

Search

Navigation