chapter  5
21 Pages

UNCERTAINTY IN ECONOMICS

WithJohn D. Hey

The title of this chapter was given to me by the editors of this volume. Whether they intended it or not, it is open to two interpretations: the treatment of uncertainty within economics, or the present uncertainty within the profession as to the appropriate treatment of uncertainty in economics. I shall interpret it in both ways. The schizophrenic nature of the title accurately reflects the present schizophrenic attitude towards the treatment of uncertainty by the profession: on the one hand, most economists applying uncertainty theory use subjective expected utility theory (SEUT) as their starting point (numerous examples can be found elsewhere in this volume); on the other hand, many economists studying uncertainty theory itself are increasingly turning away from SEUT as a valid starting point, largely because empirical evidence (usually of an experimental nature-see Chapter 29) casts doubt on the basic axioms of SEUT. I shall refer to SEUT as the ‘conventional wisdom’, and shall begin by discussing it, before moving on to the exciting new developments stimulated by the empirical evidence referred to above.