Economic Decisions Under Uncertainty

One The Object of Choice under Uncertainty.- A The Basic Decision-Theoretic Approach.- 1. The Ordering of Alternatives.- 2. Action Results under Uncertainty.- B Probabilities.- 1. Probabilities as Degrees of Confidence.- 2. Objective Probability and Real Indeterminateness.- 3. The Assessment of Equivalent Objective Probabilities.- 3.1. Completely Unknown Probabilities.- 3.1.1. The Ellsberg Paradox.- 3.1.2. The Axiom of Independence.- 3.1.3. A Rehabilitation of the Principle of Insufficient Reason.- 3.1.4. Equivalent Probabilities in Tree Diagrams.- 3.1.5. Criticism of the Principle of Insufficient Reason.- 3.2. Partially Known Probabilities: The Step Theory of Probability.- 3.2.1. Completely Known Probability Hierarchies.- 3.2.2. Partly Known Probability Hierarchies.- 3.3. Result.- Two Rational Behavior under Risk.- A The Two-Parametric Substitutive Criteria.- 1. Lange’s Criterion.- 2. The Domar-Musgrave Criterion.- 3. The (?, ?) Criterion.- 4. The Mean-Semivariance Criterion.- 5. The Criterion of Equivalent Gains and Losses.- 5.1. Shackle’s Approach.- 5.2. The Krelle-Schneider Approach.- 6. Limits and Possibilities of the Statistical Criteria.- B The Lexicographic Criterion.- 1. The Unconditional Maximization of the Probability of Survival.- 1.1. The Formal Approach.- 1.2. The Problem of the Disaster Level.- 2. Aspiration Levels and Saturation Probabilities: A Pragmatic View.- C The Expected-Utility Criterion.- 1. The Approach of G. Cramer and D. Bernoulli.- 1.1. The Basic Idea.- 1.2. Examples.- 1.3. An Illustrative Measure of Risk Aversion: The Intensity of Insurance Demand.- 1.4. The Problem of Cardinal Utility.- 1.5. Specific Risk Preference.- 2. The von Neumann-Morgenstern Index.- 2.1. The Axioms.- 2.2. The Derivation of the Expected-Utility Rule from the Axioms.- D Comparison of Preference Functional.- 1. Expected Utility versus Lexicographic Preference: The Decision for a Decision Criterion.- 2. Expected Utility and the Two-Parametric Substitutive Criteria: Searching for an Operational Alternative.- 2.1. Common Preference Structures.- 2.1.1 The Domar-Musgrave Criterion.- 2.1.2. The Criterion of Krelle and Schneider.- 2.1.3. The (?, ?) Criterion.- 2.1.4. The Mean-Semivariance Criterion.- 2.1.5. Result.- 2.2. The Local Quadratic Approximation.- 2.2.1. The Asymptotic Efficiency of the Variance.- 2.2.2. Examples.- 2.2.3. The Shape of the Pseudo Indifference Curves in the (?, ?) Diagram.- 2.3. Indifference Curves in the (?, ?) Diagram for Linear Distribution Classes.- 2.4. Conclusions: The (?, ?) Criterion as Proxy for the Expected-Utility Criterion.- Appendix 1.- Appendix 2.- Three The Structure of Risk Preference.- A Psychological Aspects of Risk Evaluation.- 1. Psychological Relatively Laws.- 1.1. Bernoulli’s Relatively Law.- 1.2. The Relativity of Stimulus Thresholds.- 1.3. The Psychophysical Law.- 1.3.1. Fechner’s Law.- 1.3.2. Stevens’s Law.- 1.3.3. The Missing Numeraire.- 1.3.4. Fechner’s Law versus Stevens’s Law: The Empirical Evidence.- 1.3.5. Result.- 1.4. The Common Basis: Weber’s Relativity Law.- 2. Risk Preference and Weber’s Relativity Law.- 2.1. The Relativity Law and the von Neumann-Morgenstern Function.- 2.2. The Relatively Law in the (?, ?) Diagram.- 2.3. Implications for the Intensity of Insurance Demand.- 2.3.1. The Influence of Subjective Risk Aversion.- 2.3.2. The Influence of Wealth.- 2.4. Result.- B The BLOOS Rule.- 1. The Complete Preference Ordering under Weak Risk Aversion (0 Distributions.- 1.2. Indifference Curves in the (?, ?) Diagram for Linear Distribution Classes.- 1.3. Critique of the Subjectivist Foundation of Risk Preference.- 2. The Complete Indifference-Curve System in the Case of Strong Risk Aversion (? ? 1): The Implicit Lexicographic Ordering.- C Arrow’s Hypothesis of Increasing Relative and Decreasing Absolute Risk Aversion.- 1. The St. Petersburg Paradox.- 2. The Utility Boundedness Theorem.- 3. The Missing Behavioral Implications of the Utility Boundedness Theorem.- Appendix 1.- Appendix 2.- Appendix 3.- Appendix 4.- Four Multiple Risks.- A Simultaneous Risks.- 1. The Law of Large Numbers and the Mean-Value Criterion.- 2. The Correlation of Risks.- 3. Weber’s Relativity Law as the Proper Basis of the Mean-Value Criterion in the Case of Large Numbers.- 4. Conclusions.- B Sequential Risks.- 1. Optimal Multiperiod Planning of a Pure Investment Program under Uncertainty.- 1.1. The Growth Optimum Model.- 1.2. The Solution by Means of Stochastic Dynamic Optimization.- 2. Optimal Multiperiod Planning of a Consumption-Investment Program.- 2.1. The Multiperiod Preference Functional.- 2.1.1. Specific Risk Preference in Multiperiod Planning.- 2.1.2. A Preference Functional According to Fechner’s Law.- 2.2. The Recursive Solution.- 2.3. Interpretation of the Solution.- 2.3.1. The Rehabilitation of the One-Period Approach.- 2.3.2. Time and Risk Aversion.- 2.3.3. The Optimal Consumption Strategy.- 2.4. Result: The Surprising Simplicity of Multiperiod Planning.- Five Areas of Application.- A Portfolio Theory.- 1. The Decision Problem.- 2. On the Applicability of the (?, ?) Approach for Portfolio Management.- 3. Implications of an Optimal Portfolio Structure.- 3.1. The Advantage of Diversification.- 3.2. The Age Dependence of the Optimal Portfolio Structure.- 3.3. The Wealth Independence of the Optimal Portfolio Structure.- 3.3.1. The Apparent Rejection of the Relativity Axiom by the Observation of a Decreasing Velocity of Money Circulation.- 3.3.2. A Risk-Theoretic Wealth Effect of a Government Budget Deficit.- 4. Summary.- B The Theory of Currency Speculation.- 1. The Basic Problems of the Spot and Forward Speculators.- 1.1. Forward Speculation.- 1.2. Spot Market Speculation.- 1.3. Interest Arbitrage as the Link Between Spot and Forward Speculation.- 1.4. Integrating the Speculation Problem into the Basic Multiperiod Approach.- 2. Optimal Speculation in the Ideal Case.- 2.1. The Two-Sided (?, ?) Diagram.- 2.2. The Reaction of the Demand for Forward Currency to Changes in Expectations.- 2.2.1. Changes in the Expected Spot Rate.- 2.2.2. Changes in the Variance of the Future Spot Rate.- 2.3. The Wealth Effect and the Stability Problem.- 3. On the Possibility of an Excessively Short Position.- 4. Summary.- C Theory of Insurance Demand.- 1. Insurance Demand for Given Risks.- 1.1. The Basic Calculus of the Insurance Purchaser.- 1.2. The Maximum Willingness to Pay for a Full-Coverage Insurance Contract.- 1.3. The Optimal Degree of Coverage.- 1.4. The Age Dependence of Insurance Demand.- 2. Insurance and the Size of Risk.- 2.1. The Insurance-Induced Substitution Effect under Ideal Conditions.- 2.2. Moral Hazard.- 2.2.1. Deliberate Destruction of the Object Insured.- 2.2.2. The Excess Burden of the Cost-Compensation Principle.- 2.2.3. The Optimal Loss Prevention Policy under Community Rating.- 2.3. The Allocation of Liability Risks.- 2.3.1. The Incentive to Shift Risks.- 2.3.2. The Role of the Coase Theorem.- 2.3.3. The Advantage of Compulsory Insurance.- 3. Summary.- List of Abbreviated Journals.- Author Index.