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Probability and Rationality in Economics

In: Economic Theory, Welfare and the State

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  • Robin Rowley

Abstract

Many years ago, Knight (1921) insisted that ‘if we are to understand the workings of the economic system we must examine the meaning and significance of uncertainty; and to this end some inquiry into the nature and significance of knowledge itself is necessary’. He provided a simple distinction between risk and uncertainty, in which the former was identified with the existence of probability distributions, but this distinction proved inadequate as probabilistic concepts were expanded and as their connections with knowledge were clarified. Further the vagaries of individual decisions produced a conflict between views that the axioms of probability were descriptive and those that stressed rationality, sometimes in a prescriptive sense. Other conflicts emerged as important qualifications to the application of probability were ignored and as the number of different conceptions of probability grew. Qualifiers such as objective and subjective lost their meaning.

Suggested Citation

  • Robin Rowley, 1990. "Probability and Rationality in Economics," Palgrave Macmillan Books, in: Athanasios Asimakopulos & Robert D. Cairns & Christopher Green (ed.), Economic Theory, Welfare and the State, chapter 5, pages 87-99, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-10911-1_5
    DOI: 10.1007/978-1-349-10911-1_5
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