Principle of Uncertain Future
AbstractThe 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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uncertainty; risk; market; banking; industry; development; investments; insurance; utility;
Find related papers by JEL classification:
- C - Mathematical and Quantitative Methods
- D - Microeconomics
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- A1 - General Economics and Teaching - - General Economics
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-22 (All new papers)
- NEP-IAS-2006-12-22 (Insurance Economics)
- NEP-PPM-2006-12-22 (Project, Program & Portfolio Management)
- NEP-UPT-2006-12-22 (Utility Models & Prospect Theory)
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