IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/1959.html
   My bibliography  Save this paper

Principle of uncertain future and utility

Author

Listed:
  • Harin, Alexander

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 ~100% and ~0% to the middle probability values). 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 basic utility problems are provided.

Suggested Citation

  • Harin, Alexander, 2007. "Principle of uncertain future and utility," MPRA Paper 1959, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:1959
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/1959/1/MPRA_paper_1959.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kenneth Y. Chay & Patrick J. McEwan & Miguel Urquiola, 2005. "The Central Role of Noise in Evaluating Interventions That Use Test Scores to Rank Schools," American Economic Review, American Economic Association, vol. 95(4), pages 1237-1258, September.
    2. John Quiggin, 2005. "The precautionary principle in environmental policy and the theory of choice under uncertainty," Murray-Darling Program Working Papers WPM05_3, Risk and Sustainable Management Group, University of Queensland.
    3. 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.
    4. 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.
    5. Quiggin, John, 2005. "Economists and Uncertainty," Risk and Sustainable Management Group Working Papers 151169, University of Queensland, School of Economics.
    6. John D. Hey & Chris Orme, 2018. "Investigating Generalizations Of Expected Utility Theory Using Experimental Data," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 3, pages 63-98, World Scientific Publishing Co. Pte. Ltd..
    7. 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.
    8. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-563, June.
    9. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-1280, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Harin, Alexander, 2015. "“Luce problem” and discontinuity of Prelec’s function at p = 1," MPRA Paper 63672, University Library of Munich, Germany.
    2. Harin, Alexander, 2011. "Теоремы О Существовании Разрывов На Числовых Отрезках И В Шкале Вероятностей И Некоторые Возможности Их Применения [Theorems of existence of the ruptures in numerical segments and in the probabilit," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue 12, pages 5-7.
    3. Harin, Alexander, 2014. "Is data interpretation in utility and prospect theories unquestionably correct?," MPRA Paper 53880, University Library of Munich, Germany.
    4. Harin, Alexander, 2019. "Behavioral sciences and auto-transformations. Introduction," MPRA Paper 97344, University Library of Munich, Germany.
    5. Harin, Alexander, 2014. "General correcting formulae for forecasts," MPRA Paper 55283, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alexander Harin, 2006. "Principle of Uncertain Future," Microeconomics harin_alexander.34115-061, Socionet.
    2. Harin, Alexander, 2006. "Scientific Revolution? A Farewell to EconWPA. MPRA is welcome," MPRA Paper 71, University Library of Munich, Germany.
    3. Harin, Alexander, 2014. "Problems of utility and prospect theories. A discontinuity of Prelec’s function," MPRA Paper 61027, University Library of Munich, Germany.
    4. Alexander Harin, 2005. "A Rational Irrational Man," Public Economics 0511005, University Library of Munich, Germany.
    5. Harin, Alexander, 2014. "Problems of utility and prospect theories. Certainty effect near certainty," MPRA Paper 61026, University Library of Munich, Germany.
    6. Alexander Harin, 2006. "A Rational Irrational Man?," Microeconomics harin_alexander.34115-060, Socionet.
    7. Harin, Alexander, 2014. "Problems of utility and prospect theories. A ”certain-uncertain” inconsistency of the random-lottery incentive system," MPRA Paper 55706, University Library of Munich, Germany.
    8. Alexander Harin, 2005. "Gains and losses. The same or different choices?," International Finance 0508004, University Library of Munich, Germany.
    9. Alexander Harin, 2005. "Gains and losses: the same or different choices? A “non-ideal” economics approach," International Finance 0509002, University Library of Munich, Germany.
    10. Harin, Alexander, 2013. "A non-zero dispersion leads to the non-zero bias of mean," MPRA Paper 47559, University Library of Munich, Germany.
    11. Luís Santos-Pinto & Adrian Bruhin & José Mata & Thomas Åstebro, 2015. "Detecting heterogeneous risk attitudes with mixed gambles," Theory and Decision, Springer, vol. 79(4), pages 573-600, December.
    12. Syngjoo Choi & Jeongbin Kim & Eungik Lee & Jungmin Lee, 2022. "Probability Weighting and Cognitive Ability," Management Science, INFORMS, vol. 68(7), pages 5201-5215, July.
    13. Pavlo Blavatskyy, "undated". "Efficient elicitation of utility and probability weighting functions," IEW - Working Papers 211, Institute for Empirical Research in Economics - University of Zurich.
    14. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    15. Rablen, Matthew D., 2019. "Foundations of the Rank-Dependent Probability Weighting Function," IZA Discussion Papers 12701, Institute of Labor Economics (IZA).
    16. Alexander Harin, 2013. "Data dispersion near the boundaries: can it partially explain the problems of decision and utility theories?," Working Papers hal-00851022, HAL.
    17. Özalp Özer & Yanchong Zheng, 2016. "Markdown or Everyday Low Price? The Role of Behavioral Motives," Management Science, INFORMS, vol. 62(2), pages 326-346, February.
    18. Fehr-Duda, Helga & Epper, Thomas & Bruhin, Adrian & Schubert, Renate, 2011. "Risk and rationality: The effects of mood and decision rules on probability weighting," Journal of Economic Behavior & Organization, Elsevier, vol. 78(1-2), pages 14-24, April.
    19. Harin, Alexander, 2009. "Общая Корректирующая Формула Прогнозирования [General forecasting correcting formula]," MPRA Paper 15533, University Library of Munich, Germany.
    20. James Andreoni & Charles Sprenger, 2011. "Uncertainty Equivalents: Testing the Limits of the Independence Axiom," NBER Working Papers 17342, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    risk; market; banking; industry; development; investments; insurance; hidden causes;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • A1 - General Economics and Teaching - - General Economics
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:1959. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.