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Social and Behavioral Sciences Commons

Open Access. Powered by Scholars. Published by Universities.®

1989

Yale University

Uncertainty

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Full-Text Articles in Social and Behavioral Sciences

Risk Analysis In Economics: An Application To University Finances, William D. Nordhaus Sep 1989

Risk Analysis In Economics: An Application To University Finances, William D. Nordhaus

Cowles Foundation Discussion Papers

Although the theory of decision making under uncertainty has been extensively studied for a half century, applications to business applications are relatively rare. This study frames a systematic risk analysis and applies the technique to the finances of private colleges and universities. It begins by constructing budgets for colleges and universities and then analyzes the major economic factors affecting those budgets. It estimates the variability (or unpredictability) associated with each major external variable from historical data and from economic forecasts. The study finds that government-spending risks outweigh all other external stock market, interest rates, inflation, and wage trends. The paper …


Market Innovation And Entrepreneurship: A Knightian View, Truman F. Bewley Apr 1989

Market Innovation And Entrepreneurship: A Knightian View, Truman F. Bewley

Cowles Foundation Discussion Papers

Stimulated by Frank Knight’s work, “Risk, Uncertainty and Profit,” I present a theory of innovation based on what I term Knightian decision theory. This theory includes a concept of uncertainty aversion, a behavioral property that makes people reluctant to undertake new unevaluatable risks. This aversion is compounded when individuals are obliged to cooperate in undertaking risks. The theory leads directly to the conclusion that innovation in business is the natural domain of individual investors with unusually low levels of uncertainty aversion. Also, it should be difficult to innovate new markets for insurance of unevaluatable risks, for the success of a …