Uncertainty and Risk in Mainstream Economics: An Outline (Niepewnosc i ryzyko w ekonomii glownego nurtu – zarys problematyki)

Tomasz Zalega ()
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Tomasz Zalega: University of Warsaw, National Economy Department, Faculty of Management, University of Warsaw

Research Reports, 2016, vol. 2, issue 21, 80-95

Abstract: Undoubtedly, risk and uncertainty are not the fundamental economic categories, yet they play an important role in economic sciences and economic practice. Unfortunately, economists do not agree as to which term was used first and offer their different interpretations. The notions “risk” and “uncertainty” often occur together and are even treated as synonyms but they do not mean the same. The article presents selected concepts and classifications of these two terms. Considerations on risk and uncertainty should focus on improving and multiplying risk measurement methods and developing theories of taking decisions that make actions more rational. All economic sciences, economic men (households, businesses), and thus the entire economy, are expecting new ways to reduce negative consequences of uncertainty and risk and increase benefits associated with these states. This article aims to outline the phenomena of uncertainty and risk. The first part focuses on clarifying the two terms and discussing their basic types. The next section concentrates on the differences between uncertainty and risk, followed by risk measurement methods and evaluation criteria for decisions made under uncertainty. The main part hereof covers decisionmaking under risk. This issue is presented by providing some insight into the principle of expected value maximisation, the St. Petersburg paradox, the expected utility hypothesis, the principle of subjective expected utility, the Allais paradox, the prospect theory and the concept of experimental utility.

Keywords: decision-making; risk; uncertainty (search for similar items in EconPapers)
JEL-codes: L26 (search for similar items in EconPapers)
Date: 2016
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