The Palgrave Encyclopedia of Strategic Management

Living Edition
| Editors: Mie Augier, David J. Teece

Certainty Equivalence

  • Daniel E. IngbermanEmail author
Living reference work entry


Strategies in dynamic games can be derived as the solutions of stochastic dynamic optimization problems. General solutions to such problems can be elusive, even with modern techniques. Simon (1955, 1957) showed that an important class of ‘linear-quadratic’ problems obey on ‘certainty equivalence’ – such stochastic dynamic optimization problems can be solved as if there is no uncertainty, by substituting expected values for all uncertain state variables. This insight became the basis for Simon’s ‘bounded rationality’ as well as rational expectations in economics.


Housing Price Rational Expectation Dynamic Optimization Problem Random Shock Dynamic Programming Problem 
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Copyright information

© The Author(s) 2016

Authors and Affiliations

  1. 1.Walter A Hass School of BusinessBerkeleyUSA