J.M. Keynes Versus F.H. Knight by Yasuhiro Sakai

Author:Yasuhiro Sakai
Language: eng
Format: epub
ISBN: 9789811380006
Publisher: Springer Singapore

(4.7)

(4.8)

Hence, we find the following sequence of equivalent relations:

(4.9)

Apparently, the two equivalent relations (4.6) and (4.9) are not compatible! This is really the essence of the famous Ellsberg paradox. In order to resolve the paradox, the first thing we should do is to seek very nice ways to get rid of the traditional expected utility theory.

4.3.3 Alternative Ways to Resolve Ellsberg’s Paradox

Generally speaking, any kind of paradox would be a challenge to any intellectual person. In historical perspective, there have been several attempts to solve Ellsberg’s paradox. Although Ellsberg (1961, 1962/2001) himself attempted to propose his own solution, it is quite unfortunate that it has not been well-received and almost forgotten.

In our opinion, possibly the simplest solution is conceivable if Keynes’ half-forgotten analysis of interval estimate technique is adopted here.6

Keynes once remarked:

The sphere of inexact numerical comparison is not quite so limited. Many probabilities, which are incapable of numerical measurement, can be placed nevertheless between numerical limits. And by taking particular non-numerical probabilities as standards a great number of comparisons or approximate measurements become possible. (Keynes 1921, p.160)

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