Red herrings: Some thoughts on the meaning of zero-probability events and mathematical modeling |
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| Authors: | Edi Karni |
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| Institution: | 1. Institute of International Economy, University of International Business and Economics, China;2. School of International Trade and Economics, University of International Business and Economics, China;3. School of Finance, Central University of Finance and Economics, China;1. Munich Graduate School of Economics, Ludwig Maximilian University, Kaulbachstr. 45, Munich 80539, Germany;2. Faculty of Industrial Engineering and Management, Technion, Haifa 32000, Israel;1. Dept. Fundamentos del Análisis Económico I, BRiDGE, University of the Basque Country (UPV/EHU), Spain;2. Instituto Economía Pública, BRiDGE, University of the Basque Country (UPV/EHU), Spain;3. Dept. Economía Aplicada IV, BRiDGE, University of the Basque Country (UPV/EHU), Spain;1. Institut de statistique, biostatistique et sciences actuarielles (ISBA), Université Catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium;2. IESEG School of Management, LEM, Lille, France;3. CORE, Université Catholique de Louvain, Louvain-la-Neuve, Belgium;1. Department of Finance and Insurance, Lingnan University, Tuen Mun, Hong Kong;2. Private Enterprise Research Center, Texas A&M University, College Station, TX 77845, USA |
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| Abstract: | Kicking off the discussion following Savage's presentation at the 1952 Paris colloquium, Arrow raised what he considered to be a difficulty with the intuitive interpretation of Savage's theorem. It suggests that decision makers strictly prefer betting on an event of measure zero over betting on a proper subset of that event. Within the realm of the revealed-preference methodology and limited verifiability, Arrow's difficulty is a red herring: the problem he poses has its origin in the technical aspects of Savage's model and not in its substantive aspect. |
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