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Principle of Uncertain Future

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  • Alexander Harin

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    (Modern University for the Humanities)

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    Abstract

    The principle of uncertain future: the probability of a future event contains a degree of (hidden) uncertainty. As a result, this uncertainty (in a sense, similar to vibrations, fluctuations) pushes the probability value back from the bounds to the middle of its range (from the very high and very low probability values to the middle ones). In other words, the real values of high probabilities are lower than the preliminarily determined ones. Conversely, the real values of low probabilities are higher than the preliminarily determined ones. This result provides the uniform solution of a number of fundamental problems: the underweighting of high and the overweighting of low probabilities, the Allais paradox, risk aversion, loss aversion, the Ellsberg paradox, the equity premium puzzle, etc. The principle and its consequences can be applied in the fields of banking, investment, insurance, trade, industry, planning and forecasting. Explanations of the principle and examples of solution of three types of fundamental problems are provided.

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    Bibliographic Info

    Paper provided by Socionet in its series Microeconomics with number harin_alexander.34115-061203.

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    Length: 16
    Date of creation: 04 Dec 2006
    Date of revision:
    Handle: RePEc:nos:wuwpmi:harin_alexander.34115-061203

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    Related research

    Keywords: uncertainty; risk; market; banking; industry; development; investments; insurance; utility;

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    References

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    1. Helga Fehr-Duda & Marc Schürer & Renate Schubert, 2006. "What Determines the Shape of the Probability Weighting Function?," CER-ETH Economics working paper series 06/54, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    2. Capuano, Christian, 2006. "Strategic noise traders and liquidity pressure with a physically deliverable futures contract," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 1-14.
    3. repec:ebl:ecbull:v:28:y:2004:i:11:p:a0 is not listed on IDEAS
    4. Alexander Harin, 2006. "Economic uncertainty principle?," Working Papers halshs-00090791, HAL.
    5. Alexander Harin, 2005. "A new approach to solve old problems," Game Theory and Information 0505005, EconWPA.
    6. Carmela Di Mauro & Anna Maffioletti, 2004. "Attitudes to risk and attitudes to uncertainty: experimental evidence," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 357-372.
    7. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
    8. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-80, November.
    9. Alexander Harin, 2004. "Arrangement infringement possibility approach: some economic features of large-scale events," Economics Bulletin, AccessEcon, vol. 28(11), pages A0.
    10. John Hey, 2005. "Why We Should Not Be Silent About Noise," Experimental Economics, Springer, vol. 8(4), pages 325-345, December.
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    Cited by:
    1. Harin, Alexander, 2011. "Теоремы О Существовании Разрывов На Числовых Отрезках И В Шкале Вероятностей И Некоторые Возможности Их При�," EconStor Open Access Articles, ZBW - German National Library of Economics.

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