Uncertainty Term Used

Uncertainty Term Used

Uncertainty, term used by economists in its everyday meaning of unpredictability or imperfect foresight. The concept of uncertainty is still in the process of being incorporated into economic theory. Much analysis is in terms of static conditions and perfect knowledge, so that problems arising from the existence of uncertainty are assumed away. For example, in much of the theory of the financier the individual entrepreneur is assumed to know all the circumstances necessary for him to maximize profits or minimize losses. But in the real world entrepreneurs do not know how much of their goods will sell at different prices, what will be the effects on sales of different advertising methods and costs, how their rivals will react to changes in their policies, and so oil; their policy has therefore to be based on estimates and guesses. When uncertainty enters the analysis, simplicity and precision disappear along with many of the conclusions of static analysis.

The existence of uncertainty means that the outcome of an action cannot be known beforehand, or, i.e., what happens may be different from what was expected. Individuals frequently have to choose between several possible actions for each of which there are a -large number of possible outcomes. The problem is to determine how, in such a situation, an individual reaches a decisiou. The traditional solution is in terms of the theory of probability. If the actions, being repeatable, have been undertaken a large number of times, it is possible to calculate the chances or probabilities that various possible outcomes will result from each of the possible actions. In this way ignorance and uncertainty are reduced, and comparisons can be made of the various possible actions open, of which the best is that which offers the largest (statistical) probability of achieving the desired result.

Probability theory does not help if the actions cannot be repeated. For choosing between several possible unique actions, for each of which there can be a large number of possible outcomes, the British economist Professor G. L. S. Shackle has developed a theory of which a bare outline is as follows. The individual who has to make a choice focuses his attention on the best and the worst possible outcomes for each of the possible actions. He may think that some out--comes are more likely than others. The best and the worst possible outcomes for each possible action can be converted into values corresponding to the outcomes that seem equally likely. For each set of converted best and worst possible outcomes, a point can be plotted on a gambler's indifference map for each possible action. The point (or points) falling on the highest indifference curve then indicates the best possible action (or actions). A point on a higher indifference curve is preferable to a point on a lower curve, because for the same loss a larger gain is possible.

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