20c_Arrow_securities

20c_Arrow_securities - Arrow Securities and States of...

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Arrow Securities and States of Nature Kenneth Arrow confronted the same problem Irving Fisher had half a century before. How could he extend general equilibrium to include uncertainty, and still deal with f nancial assets? Arrow’s great invention was the state of nature. He borrowed that from Leibnitz (the brilliant philosopher and mathematician, who suggested modeling uncertainty as not knowing which state the world would be in, and who coined the phrase we live in the best of all possible worlds). Probabilists and statisticians had of course also worked with states of the world. Arrow’s pioneering advance was to say that one could think of an apple in case it ra in sa sad i f erent commodity from the same apple in case it does not rain. One could imagine buying one of those goods and not the other. For example, it would be e
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This note was uploaded on 12/08/2009 for the course ECON 251 at Yale.

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