Economic Theory Errors

Abstract (Via Nova Scotia)

Until recently it has been assumed that the problem of constructing preference scales on which mathematical operations can be performed was solved by von Neumann and Morgenstern’s utility theory. This is an important problem because until the publication of von Neumann and Morgenstern’s Theory of Games and Economic Behavior in 1944, the possibility of measurement of non-physical variables such as preference had been an open question and also because preference measurement underpins economic theory, the theory of games, and decision theory. Recent research1 has revealed errors at the foundations of economic theory, game theory, and other disciplines including the inapplicability of the operations of addition and multiplication on utility scale values. The mathematical foundations of economic theory have been reconstructed but additional corrections are required.

Favorite Execerpt (Via Nova Scotia)

Utility theory, which underpins economic theory as well as the theory of games and decision theory, cannot serve as a foundation for mathematical methods in any scientific discipline. The operations of addition and multiplication are not applicable on scale values in any version of utility theory and, in addition to other shortcomings, although von Neumann and Morgenstern’s utility axioms are consistent in the abstract, the interpretation of the empirical utility operation in terms of lotteries and prizes creates an intrinsic contradiction: The theory permits lotteries that are prizes and has a rule for assigning values to prizes and a different, conflicting, rule for assigning values to lotteries. For a prize which is a lottery ticket, the conflicting rules are contradictory.

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23. September 2009 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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