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Certainty Equivalence and Inequivalence for Prices

In: Value and Capital: Fifty Years Later

Author

Listed:
  • Kenneth J. Arrow

    (Stanford University)

Abstract

A basis for the analysis of economic behaviour under uncertainty has existed ever since Daniel Bernoulli’s famous paper (1738). Indeed, Bernoulli applied his expected-utility theory to explaining the de mand for marine insurance—the problem, of course, being to explain positive demand for a risk with negative expected value. Bernoulli saw clearly that both the Gedanken evidence of the St Petersburg paradox and the real-world purchase of insurance were simply state ments that the certainty-equivalent of a risk was not its expected value; his clear analysis led him to the synthesis of an alternative theory of behaviour.

Suggested Citation

  • Kenneth J. Arrow, 1991. "Certainty Equivalence and Inequivalence for Prices," International Economic Association Series, in: Lionel W. McKenzie & Stefano Zamagni (ed.), Value and Capital: Fifty Years Later, chapter 2, pages 41-63, Palgrave Macmillan.
  • Handle: RePEc:pal:intecp:978-1-349-11029-2_3
    DOI: 10.1007/978-1-349-11029-2_3
    as

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