Certainty Equivalence and Inequivalence for Prices

Abstract

A basis for the analysis of economic behaviour under uncertainty has existed ever since Daniel Bernoulli’s famous paper (1738). Indeed, Bernoulli applied his expected-utility theory to explaining the de mand for marine insurance—the problem, of course, being to explain positive demand for a risk with negative expected value. Bernoulli saw clearly that both the Gedanken evidence of the St Petersburg paradox and the real-world purchase of insurance were simply state ments that the certainty-equivalent of a risk was not its expected value; his clear analysis led him to the synthesis of an alternative theory of behaviour. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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