Choice under uncertainty

Abstract

First paragraph: Mainstream choice theory is based on a complete map of preferences and fully known income. This is extended into the future by invoking state-contingent preferences. Under these conditions there is only one possible ‘choice’. There is perfect knowledge or its stochastic equivalent, and therefore no uncertainty. The exercise of this ‘choice’ is seen as evidence of rationality. The identification of rationality with perfect knowledge goes back to the Greeks (Vercelli 1991), but the requirement of perfect knowledge flies in the face of rationality in the sense used in everyday life. Perfect knowledge of the present and past is beyond the capacity of any human brain, and the fact that certain knowledge of the future is impossible is acknowledged by all who are rational in the ordinary sense. Although perfect-knowledge rationality is used as the benchmark in mainstream evaluations of theory, to believe that we possess it is irrational in the extreme. Indeed if you were in a situation of certainty, how would you know? (Dow 1995).