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To conclude, I argue that the government should not display risk aversion in its behavior. Hence, the proper procedure is to compute the expected val… - Kenneth Arrow
" "To conclude, I argue that the government should not display risk aversion in its behavior. Hence, the proper procedure is to compute the expected values of benefits and costs, and discount them at a riskless rate, contrary to the view of Hirshleifer (1964, p. 85).
Suppose the future to be unknown; it is known that one of a set of states will prevail, and their probabilities are known (or believed in). A given state means a complete description of all production possibilities, so that all uncertainties are resolved when the state is known. To summarize some earlier discussions (Arrow, 1964b; Deberu, 1959, chap 7; Hrishleifer, 1964, pp. 80-85), we can achieve an optimal allocation if we imagine markets in all possible commodity-options, a commodity-option being an obligation to deliver a fixed amount of a given commodity if, and only if, a given state prevails.
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About Kenneth Arrow
Kenneth Joseph Arrow (August 23, 1921 – February 21, 2017) was an American economist, who was Professor Emeritus of Economics in Stanford, and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972.
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Kenneth Joseph Arrow
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Kenneth J. Arrow
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Ken Arrow
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Additional quotes by Kenneth Arrow
The problem of interpersonal comparison of utilities seems to bother economists more than philosophers. As already indicated, utility or satisfaction or any other similar concept appears in economic theory as an explanation of individual behavior, for example, as a consumer. Specifically, it is hypothesized that the individual chooses his consumption so as to maximize his utility, subject to the constraints imposed by his budget. But, for this purpose, a quantitatively measurable utility is a superfluous concept. All that is needed is an ordering, that is, a statement for each pair of consumption patterns as to which is preferred.
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Clearly, information is of the utmost importance in making economic decisions, especially when it comes to securities or other assets whose value depends on events not yet known. Now the distribution of information cannot simply be taken as given. On the contrary, information can be acquired at some cost.
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