Principle of Uncertain Future
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.
References listed on IDEAS
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- 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.
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- Alexander Harin, 2005. "A new approach to solve old problems," Game Theory and Information 0505005, EconWPA.
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- Alexander Harin, 2006. "Economic uncertainty principle?," Working Papers halshs-00090791, HAL.
- repec:ebl:ecbull:v:28:y:2004:i:11:p:a0 is not listed on IDEAS
- 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.
- John Hey, 2005. "Why We Should Not Be Silent About Noise," Experimental Economics, Springer;Economic Science Association, vol. 8(4), pages 325-345, December.
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