On Keynes's conception of the weight of evidence

Various modern decision theories seek to capture the intuition behind Keynes's conception of evidential weight. Keynes was nevertheless hesitant about the practical relevance of weight in the process of rational decision making because of the 'stopping problem' of finding a rational principle to decide where to stop the process of acquiring information in forming a probability judgment before making a decision. This paper discusses the relevance of the stopping problem by way of an inquiry into the nature, properties and implications for rational decision making of Keynes's conception of evidential weight. It is argued that in practical choice situations the decision maker often decides where to stop the process of acquiring information by following Keynes's advice to consider the degree of completeness of the available information before making a decision. This method implies that the decision maker is able to arrive at an assessment of the dimension of what may be called her 'relevant ignorance'. By considering some examples of how the acquisition of new evidence may affect the decision maker's behaviour, it is argued that it is in fact possible to talk reasonably about relevant ignorance, or what are sometimes called 'unknown unknowns', and that this concept might explain a range of human behaviours. While this concept does not provide a rational principle to solve the stopping problem, it does provide a method of inquiry for dealing with a number of paradoxes not solvable within the Bayesian approach.Uncertainty Weight of evidence Decision making Keynes

On the relationship between Keynes’s conception of evidential weight and the Ellsberg paradox

A number of scholars have noted that Ellsberg’s seminal 1961QJE critique of the subjective expected utility model bears certain resemblances to ideas expressed in J. M. Keynes’s 1921 A Treatise on Probability. Ellsberg did not mention Keynes’s work in his article and referred instead to F. Knight’s distinction between ‘risk’ and ‘uncertainty’, thus inspiring a literature on various aspects of ‘Knightian uncertainty’. Nevertheless, the recent publication of Ellsberg’s PhD dissertation [Ellsberg, D. (2001). Risk, ambiguity and decision. New York: Garland Publishing], submitted to the University of Harvard in 1962, reveals that Ellsberg was actually aware of Keynes’s work. This gives rise to a number of interesting questions concerning the relation between the two authors’ works. The present paper, drawing in part on a conversation with Ellsberg, attempts to answer these questions. It turns out that the ‘mystery’ of why Ellsberg did not mention Keynes in his QJE article has a simple solution, namely that his dissertation was only completed after he had written the QJE article and that he had only come across Keynes after writing the QJE article. However, it is argued that although Ellsberg recognised the link between his notion of ambiguity and Keynes’s conception of the weight of argument in his PhD dissertation, he did not fully appreciate the fact that Keynes was more concerned with ‘practical’ rather than ‘conventionalised’ choice situations. To this extent, therefore, it is fair to say that ‘Knightian uncertainty’ is in many ways closer to the ideas expressed by Keynes than by Knight, and Keynes’s actual contribution to modern decision theory has been underestimated

De Finetti on the insurance of risks and uncertainties

In the insurance literature, it is often argued that private markets can provide insurance against ‘risks’ but not against ‘uncertainties’ in the sense of Knight ([1921]) or Keynes ([1921]). This claim is at odds with the standard economic model of risk exchange which, in assuming that decision-makers are always guided by point-valued subjective probabilities, predicts that all uncertainties can, in theory, be insured. Supporters of the standard model argue that the insuring of highly idiosyncratic risks by Lloyd's of London proves that this is so even in practice. The purpose of this article is to show that Bruno de Finetti, famous as one of the three founding fathers of the subjective approach to probability assumed by the standard model, actually made a theoretical case for uncertainty within the subjectivist approach. We draw on empirical evidence from the practice of underwriters to show how this case may help explain the reluctance of insurers to cover highly uncertain contingencies