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Decisions under Imperfect Knowledge: The Certainty Equivalence Theory as an Alternative to the Von Neumann-Morgenstern Theory of Uncertainty

Jagdish Handa
Erkenntnis (1975-)
Vol. 20, No. 3 (Nov., 1983), pp. 295-328
Published by: Springer
Stable URL: http://www.jstor.org/stable/20010885
Page Count: 34
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Decisions under Imperfect Knowledge: The Certainty Equivalence Theory as an Alternative to the Von Neumann-Morgenstern Theory of Uncertainty
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Abstract

This paper offers a modified version of the certainty equivalence (CE) theory of utility for uncertain prospects and a new set of axioms as its basis. It shows that the CE and the von Neumann-Morgenstern (NM) approaches to uncertainty are opposite in spirit: The CE approach represents a flight from the world of uncertainty to the rules of certainty while the NM approach represents a flight from the world of certainty to one of uncertainty. The two approaches differ even in their treatment of compound prospects and their actuarially identical simple counterparts.

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