De Finetti was Right: Probability Does Not Exist
AbstractDe Finetti's treatise on the theory of probability begins with the provocative statement PROBABILITY DOES NOT EXIST, meaning that probability does not exist in an objective sense. Rather, probability exists only subjectively within the minds of individuals. De Finetti defined subjective probabilities in terms of the rates at which individuals are willing to bet money on events, even though, in principle, such betting rates could depend on state-dependent marginal utility for money as well as on beliefs. Most later authors, from Savage onward, have attempted to disentangle beliefs from values by introducing hypothetical bets whose payoffs are abstract consequences that are assumed to have state-independent utility. In this paper, I argue that de Finetti was right all along: PROBABILITY, considered as a numerical measure of pure belief uncontaminated by attitudes toward money, does not exist. Rather, what exist are de Finetti's `previsions', or betting rates for money, otherwise known in the literature as `risk neutral probabilities'. But the fact that previsions are not measures of pure belief turns out not to be problematic for statistical inference, decision analysis, or economic modeling. Copyright Kluwer Academic Publishers 2001
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Theory and Decision.
Volume (Year): 51 (2001)
Issue (Month): 2 (December)
Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=100341
Probability; Beliefs; Values; Statistical inference; Decision theory;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark J. Machina & David Schmeidler, 1990.
"A More Robust Definition of Subjective Probability,"
Discussion Paper Serie A
306, University of Bonn, Germany.
- Machina, Mark J & Schmeidler, David, 1992. "A More Robust Definition of Subjective Probability," Econometrica, Econometric Society, vol. 60(4), pages 745-80, July.
- Machina,Mark & Schmeidler,David, 1991. "A more robust definition of subjective probability," Discussion Paper Serie A 365, University of Bonn, Germany.
- Schmeidler, David, 1989.
"Subjective Probability and Expected Utility without Additivity,"
Econometric Society, vol. 57(3), pages 571-87, May.
- David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
- James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
- Nau, Robert F. & McCardle, Kevin F., 1990. "Coherent behavior in noncooperative games," Journal of Economic Theory, Elsevier, vol. 50(2), pages 424-444, April.
- Joseph B. Kadane & Patrick D. Larkey, 1983. "The Confusion of Is and Ought in Game Theoretic Contexts," Management Science, INFORMS, vol. 29(12), pages 1365-1379, December.
- Karni, Edi & Schmeidler, David & Vind, Karl, 1983. "On State Dependent Preferences and Subjective Probabilities," Econometrica, Econometric Society, vol. 51(4), pages 1021-31, July.
- R. Aumann, 2010.
"Correlated Equilibrium as an expression of Bayesian Rationality,"
513, UCLA Department of Economics.
- Aumann, Robert J, 1987. "Correlated Equilibrium as an Expression of Bayesian Rationality," Econometrica, Econometric Society, vol. 55(1), pages 1-18, January.
- Robert J. Aumann, 2010. "Correlated Equilibrium as an expression of Bayesian Rationality," Levine's Working Paper Archive 661465000000000377, David K. Levine.
- Edi Karni & Philippe Mongin, 2000.
"On the Determination of Subjective Probability by Choices,"
INFORMS, vol. 46(2), pages 233-248, February.
- Karni, E. & Mongin, P., 1997. "On the Determination of Subjective Probability by Choices," Papers 9737, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
- E. Karni & Ph. Mongin, 1997. "On the determination of subjective probability by choices," THEMA Working Papers 97-37, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Cuoco, Domenico & Zapatero, Fernando, 2000. "On the Recoverability of Preferences and Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 417-31.
- AUMANN, Robert J., .
"Subjectivity and correlation in randomized strategies,"
CORE Discussion Papers RP
-167, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Aumann, Robert J., 1974. "Subjectivity and correlation in randomized strategies," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 67-96, March.
- R. Aumann, 2010. "Subjectivity and Correlation in Randomized Strategies," Levine's Working Paper Archive 389, David K. Levine.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Yaari, Menahem E., 1969. "Some remarks on measures of risk aversion and on their uses," Journal of Economic Theory, Elsevier, vol. 1(3), pages 315-329, October.
- Sugden, Robert, 1991. "Rational Choice: A Survey of Contributions from Economics and Philosophy," Economic Journal, Royal Economic Society, vol. 101(407), pages 751-85, July.
- F J Anscombe & R J Aumann, 2000. "A Definition of Subjective Probability," Levine's Working Paper Archive 7591, David K. Levine.
- Jens Carsten Jackwerth, 1998.
"Recovering Risk Aversion from Option Prices and Realized Returns,"
- Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 433-51.
- Jens Carsten Jackwerth., 1996. "Recovering Risk Aversion from Option Prices and Realized Returns," Research Program in Finance Working Papers RPF-265, University of California at Berkeley.
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
- Epstein, Larry G, 1999. "A Definition of Uncertainty Aversion," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 579-608, July.
- Nau, Robert F, 1995. "Coherent Decision Analysis with Inseparable Probabilities and Utilities," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 71-91, January.
- Ross, Stephen A, 1987. "The Interrelations of Finance and Economics: Theoretical Perspectives," American Economic Review, American Economic Association, vol. 77(2), pages 29-34, May.
- Machina, Mark J, 2001. "Almost-Objective Uncertainty," University of California at San Diego, Economics Working Paper Series qt3ps1k85f, Department of Economics, UC San Diego.
- Mark Machina, 2004. "Almost-objective uncertainty," Economic Theory, Springer, vol. 24(1), pages 1-54, 07.
- Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
- Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
- David Johnstone, 2007. "Economic Darwinism: Who has the Best Probabilities?," Theory and Decision, Springer, vol. 62(1), pages 47-96, February.
- D. Johnstone, 2007. "The Value of a Probability Forecast from Portfolio Theory," Theory and Decision, Springer, vol. 63(2), pages 153-203, September.
- Robert Nau, 2011. "Risk, ambiguity, and state-preference theory," Economic Theory, Springer, vol. 48(2), pages 437-467, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.