ABSTRACT
The area of economics most affected by uncertainty of the future is investment in plant and machinery. This chapter discusses the conventional so-called economics of uncertainty. It presents a new theory of investment evaluation under uncertainty. Expected utility theory is the accepted, conventional wisdom in the entire standard literature of the economics of uncertainty. The essential claim of expected utility theory is that the criterion for choice of preferences in the presence of uncertainty is linear in all relevant probabilities. For choosing between investment projects proper, rather than placements, a preference scale which is nonlinear in the probability of striking disaster is eminently rational. The constraints which must be imposed upon rational behavior for placements make no sense for investments proper. A practical theory of the future based on these three principles has certain marked characteristics. In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes.
