On Measuring Uncertainty: Snakes and Ladders

Pramod (Raja) Junankar

No 10244, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The Global Crisis demonstrated to the world that Ratings Agencies had misled the public about the stability of financial institutions. The Finance literature had decided that it was impossible to have bubbles in financial markets and any surge in the stock market would be self-correcting. Recent papers have discussed the role of "uncertainty" and its measurement in influencing economic decisions. They attempt to measure uncertainty by indexes of volatility of the stock market, GDP, forecaster disagreement, mentions of uncertainty in news media, and the dispersion of productivity shocks to firms. Underlying their measures of uncertainty is the hypothesis that an increase in uncertainty leads to lower consumption by households and lower investment by firms, and hence leads to lower aggregate investment and growth. This paper argues that although risk can be measured, uncertainty cannot be measured. Even though risk can be measured, a simple symmetric measure (variance or standard deviation) is inappropriate because agents are loss averse and treat gains differently from losses. Although, it is clear that an increase in uncertainty worsens economic conditions, in this paper I shall also argue that this attempt at "measuring" risk or (fundamental) uncertainty is flawed.

Keywords: uncertainty; risk; Keynes; variance measures; loss aversion; investment (search for similar items in EconPapers)
JEL-codes: E12 E22 G01 G11 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2016-09
New Economics Papers: this item is included in nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://docs.iza.org/dp10244.pdf (application/pdf)

Related works:
Working Paper: On Measuring Uncertainty: Snakes and Ladders (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp10244

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().