Economic Uncertainty and Logical Structure

Abstract

We have analyzed the fundamental “logical structure” of the neo-classical theory of choice (CCT), in its conceptually prior form, as a necessarily true, normative idealization. Now it is to be remembered that we have understood CCT as assuming that the individual consumer chooses under conditions of certainty. But the theory of economic choice has been developed by neoclassical theorists to also deal with cases in which an agent must deliberate on the basis of uncertain evidence. The most entrenched theory in neo-classical economics for situations of uncertainty focuses on conditions of risk: here no unique outcomes can be predicted with certainty for alternative action-choices, but probabilities can be assigned to all the possible consequences of each of the available alternatives. As the theory of choice under risk provides the most settled analysis of uncertain choice in contemporary economics, our investigations in this chapter will concentrate on this model. (From this point in our discussion, when reference is made to uncertainty, the specific conditions of risk shall be understood.) More particularly, we shall begin by arguing for a ramification thesis — viz., that our conception of the basic features of the “logical structure” of the neo-classical theory of choice under certainty (CCT) need not be modified, but is indeed reinforced in moving to the neo-classical model for choice under uncertainty. This investigation will be followed by an examination of proposals by certain economists themselves for alternatives to the conventional maximizing models of choice in an uncertain environment: Simon’s “satisficing” framework and Loomes’s and Sugden’s. “regret theory”.