Encyclopedia of Law and Economics

Living Edition
| Editors: Alain Marciano, Giovanni Battista Ramello

Choice Under Risk and Uncertainty

  • Gianna Lotito
  • Anna Maffioletti
Living reference work entry
DOI: https://doi.org/10.1007/978-1-4614-7883-6_757-1

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 to check access.

References

  1. 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):503–546CrossRefGoogle Scholar
  2. Allais M, Hagen O (eds) (1979) Expected utility hypothesis and the Allais paradox. D. Reidel, DordrechtGoogle Scholar
  3. Arrow K (1964) The role of securities in the optimal allocation of risk-bearing. Rev Econ Stud 31:91–96CrossRefGoogle Scholar
  4. 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)CrossRefGoogle Scholar
  5. Camerer CE, Weber M (1992) Recent developments in modeling preferences: uncertainty and ambiguity. J Risk Uncertain 5(4):325–370CrossRefGoogle Scholar
  6. de Finetti B (1937) La prévision: ses lois logiques, ses sources subjectives. Ann l H Poincaré 7(1):1–68Google Scholar
  7. Ellsberg D (1961) Risk ambiguity and the Savage axioms. Q J Econ 75:643–669CrossRefGoogle Scholar
  8. 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 YorkGoogle Scholar
  9. Kahneman D, Tversky A (1979) Prospect theory: an analysis of decision under risk. Econometrica 47:273–291CrossRefGoogle Scholar
  10. Keynes J,M (1921) A treatise on probability. McMillan, LondonGoogle Scholar
  11. Knight F (1921) Risk, uncertainty and profit. Houghton-Mifflin, BostonGoogle Scholar
  12. Loomes G, Sugden R (1982) Regret theory: an alternative theory of rational choice under uncertainty. Econ J 92:805–824CrossRefGoogle Scholar
  13. 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, DordrechtGoogle Scholar
  14. Machina M (1987) Choice under uncertainty: problems solved and unsolved. J Econ Perspect 1(1):121–154CrossRefGoogle Scholar
  15. 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, OxfordGoogle Scholar
  16. Marschak J (1950) Rational behavior, uncertain prospects, and measurable utility. Econometrica 18:111–141CrossRefGoogle Scholar
  17. Pratt JW (1964) Risk aversion in the small and in the large. Econometrica 32:122–136CrossRefGoogle Scholar
  18. Quiggin J (1982) A theory of anticipated utility. J Econ Behav Organ 3:323–343CrossRefGoogle Scholar
  19. Quiggin J (1993) Generalized expected utility theory. Kluwer, DordrechtCrossRefGoogle Scholar
  20. Raiffa H (1968) Decision analysis: introductory lectures on choices under uncertainty. Addison-Wesley, ReadingGoogle Scholar
  21. Ramsey FP (1931) Truth and probability. In: The foundations of mathematics and other logical essays. Harcourt, Brace, New YorkGoogle Scholar
  22. Savage L (1954) The foundations of Statistics. Wiley, New YorkGoogle Scholar
  23. Schmeidler D (1989) Subjective probability and expected utility without additivity. Econometrica 57(3):571–587CrossRefGoogle Scholar
  24. Starmer C (2000) Developments in non-expected utility theory. J Econ Lit 38:332–382CrossRefGoogle Scholar
  25. 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):79–102CrossRefGoogle Scholar
  26. Trautmann ST, Vieider FM, Wakker PP (2008) Causes of ambiguity aversion: known versus unknown preferences. J Risk Uncertain 36(3):225–243CrossRefGoogle Scholar
  27. Tversky A, Kahneman D (1992) Advances in prospect theory: cumulative representation of uncertainty. J Risk Uncertain 5:297–323CrossRefGoogle Scholar
  28. von Neumann J, Morgenstern O (1947) Theory of games and economic behaviour, 2nd edn. Princeton University Press, PrincetonGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.DiGSPESUniversity of Eastern PiedmontAlessandriaItaly
  2. 2.ESOMASUniversity of TurinTurinItaly