The Palgrave Encyclopedia of Strategic Management

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

Certainty Equivalence

  • Daniel E. Ingberman
Living reference work entry
DOI: https://doi.org/10.1057/978-1-349-94848-2_623-1

Abstract

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.

Keywords

Housing Price Rational Expectation Dynamic Optimization Problem Random Shock Dynamic Programming Problem 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
This is a preview of subscription content, log in to check access.

References

  1. Bertsekas, D.P. 1976. Dynamic programming and stochastic optimal control. New York: Academic.Google Scholar
  2. Hansen, L.P., and T.J. Sargent. 2007. Robustness. Princeton: Princeton University Press.Google Scholar
  3. Holt, C.C., F. Modigliani, J.F. Muth, and H.A. Simon. 1960. Planning production, inventories and work force. Englewood Cliffs: Prentice Hall.Google Scholar
  4. Lucas Jr., R.E., and T.J. Sargent. 1981. Rational expectations and econometric practice. Minneapolis: University of Minnesota Press.Google Scholar
  5. Muth, J.F. 1961. Rational expectations and the theory of price movements. Econometrica 29: 315–353.CrossRefGoogle Scholar
  6. Simon, H.A. 1955. A behavioral model of rational choice. Quarterly Journal of Economics 69: 99–118.CrossRefGoogle Scholar
  7. Simon, H.A. 1957. Models of man. New York: Wiley.Google Scholar
  8. Simon, H.A. 1992. Rational decision-making in business organizations: Nobel memorial lecture, 8 December 1987. In Nobel lectures, economic sciences, 1969–1980, ed. E. Lindbeck. Singapore: World Scientific Publishing.Google Scholar
  9. Theil, H. 1957. A note on certainty equivalence and dynamic planning. Econometrica 25: 346–349.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2016

Authors and Affiliations

  1. 1.Walter A Hass School of BusinessBerkeleyUSA