A Critique of Some Classical Theories of Decisions Under Uncertainty

Abstract

The present article describes and examines the orthodox types of uncertainty and shows that they are inadmlissibly oversimplified. Real decision situations cannot: be classified into the three classes of the orthodox rnodel. The article describes the most important classical decision criteria based on the orthodox uncertainty types. It reviews briefly some previous criticisms of them, which refer to two aspects: the different criteria give very different results from the same data. each of the criteria is incompatible with one or more reasonable requirements of consistent choice. The paper shows that the problem is not that the mathematical algorithms of these criteria are not good enough but that their common conceptual starting point is false. Therefore any decision criteria of this kind is unacceptable. Finally the paper exarninps the famous St. Perersburg paradox and shows that Bernouili's equation of the expected payoff is based on a false assumption. Correcting the equation the paradox disappears and the correct equation does not lead to the conclusion that the expected payoff is not appropriate for valuing uncertain prospects.