J. M. Keynes's Theoretical Approach to Decision-making Under Conditions of Risk and Uncertainty

Abstract

The purpose of this paper is to fill in what appears to be a missing gap in the decision theory literature. The missing gap concerns Keynes's 'conventional coefficient of risk and weight' model, which he developed in Chapter 26 of A Treatise on Probability (TP) and applied informally in The General Theory (GT) in Chapters 12-13, 17 and 22 (see Brady [1983]). This paper will be organized as follows. First, a review of the decision theory literature covering the assessments made by philosophers, psychologists, and economists, with respect to Keynes's approach, will be presented. Second, the 'nuts and bolts' of Keynes's decision rule will be examined and its operational capability demonstrated. Third, Keynes's decision rule will be used to solve the Popper and Ellsberg paradoxes, as well as some other selected problems taken from various contributions to decision theory. A final section will incorporate my conclusions.