Three Notes on "Expectation in Economics"

Abstract

IN this book' Dr. Shackle presents a new treatment of uncertainty, which is both highly original and stimulating, as an alternative to the orthodox approach with which he is very dissatisfied. In order to give a brief summary of Dr. Shackle's basic construction, let us consider the extremely simplified case where a man has the choice of either holding a certain sum of money or investing that sum in a manner which will give him a profit, x, which may be positive or negative. We are thus concerned to analyse the decision whether or not to exchange the certainty of neither gain nor loss for the possibility of either. Dr. Shackle's first contribution is the postulate that the individual's expectations concerning x can be represented by a potential surprise function , y=f (x). This gives, for each value of x, the surprise, y, which the individual thinks he would feel if x actually turned out to have that value. Potential surprise, y, can vary between a certain maximum, y, representing absolute disbelief, and zero. Zero potential surprise need not mean full certainty; indeed if the individual has no idea at all as to what the future will bring then he will attach zero potential surprise to all values of x. Dr. Shackle supposes that there will be a certain inner range of values of x, none of which would cause surprise if realised. Beyond this inner range the degree of potential surprise will rise as x is greater (a gain) and as x is smaller (a loss). In order to compare the attractiveness of holding money with that of the investment it is necessary to obtain some epitome of the potential surprise function. Here Dr. Shackle makes his second major contribution. He assumes that we epitomise the possibility of loss by considering that value of x less than zero which most attracts our attention and that we epitomise the possibility of gain by considering that value of x greater than zero which most attracts our attention. What factors draw our attention ? Dr. Shackle answers that for a given value of x our attention will be attracted more as the degree of potential surprise is less, while for a given degree of potential surprise our attention will be attracted more as x is greater (positive or negative). Thus a set of indifference curves can be drawn such that all the points on any one of them have an equal power to attract attention. It is

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