On Risk and Uncertainty, and Objective versus Subjective Probability

Keiran Sharpe

The Economic Record, 2018, vol. 94, issue S1, 49-72

Abstract: In this paper, we use the algebra R×R to characterise decision†makers’ representations of risk and uncertainty. We show that risk can be represented by objective probabilities on one part of the algebra, and that uncertainty can be represented by subjective probabilities on the other part. Decision†makers are shown to maximise a generalised form of rank†dependent expected utility. Their occasionally anomalous behaviour is discussed.

Date: 2018
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