On measurable uncertainty and the fight for taking uncertainty seriously in economics
This paper discusses the engagement of decision theorists with the issue of the measurability of uncertainty. Since Knight’s seminal distinction between risk, intended as measurable uncertainty, and unmeasurable uncertainty, the question has been to what extent the extension of the theory of choice from certainty to risk through von Neumann and Morgenstern’s Expected Utility hypothesis would allow the dealing with uncertain events. The paper investigates the significance and rationale of those authors who objected to the mainstream view that the axiomatic approach developed in the late 1940s and early 1950s, mainly in the works of Leonard Savage, makes it indeed possible to reduce uncertainty to risk. Through an analysis of the meaning attributed by authors such as Keynes, Shackle and Ellsberg to the contention that uncertainty is unmeasurable, the paper aims to investigate why this view did not emerge as a significant alternative to the mainstream up until recently. A main reason, at times alluded to but never openly discussed in the literature, is shown to be the close link between Savage and the group of decision theorists at the Cowles Commission for Research in Economics under the directorship of Marschak and Koopmans.
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Keywords: uncertainty, probability, decision-making
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