Econ 4010 Lecture 8

Econ 4010 Lecture 8 - 5 Uncertainty Theories of...

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<Lecture 8> 5. Uncertainty: Theories of Uncertainty Surprisingly, uncertainty has a rather short history in economics. The very idea that uncertainty might be relevant for economic analysis was only really suggested in 1921, Risk, Uncertainty and Profit by Frank H. Knight (1885-1972). Risk vs. Uncertainty His famous dissertation Risk, Uncertainty and Profit (1921) remains one of the most interesting reads in economics even today. In it, Knight made his famous distinction between "risk" and "uncertainty." Risk: Situations where the decision-maker can assign mathematical probabilities to the randomness which s/ he is faced with. Uncertainty: Situations when this randomness cannot be expressed in terms of specific mathematical probabilities. Many economists dispute this distinction, arguing that Knightian risk and uncertainty are one and the same thing. For instance, they argue that in Knightian uncertainty, the problem is that the agent does not assign probabilities, and not that s/he actually cannot, i.e. that uncertainty is really an epistemological and not an ontological problem, a problem of knowledge of the relevant probabilities, not of their existence. Going in the other direction, some economists argue that there are actually no probabilities out there to be known because probabilities are really only beliefs. In other words, probabilities are merely subjectively- assigned expressions of beliefs and have no necessary connection to the true randomness of the world. Post Keynesian
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Econ 4010 Lecture 8 - 5 Uncertainty Theories of...

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