De Finetti on the Insurance of Risks and Uncertainties
British Journal of the Philosophy of Science, Forthcoming
Posted: 22 Sep 2011 Last revised: 23 Sep 2011
Date Written: September 22, 2011
In the insurance literature, it is often argued that private markets can provide insurance against ‘risks’ but not against ‘uncertainties’ in the sense of Knight (1921) or Keynes (1921). This claim is at odds with the standard economic model of risk exchange which, in assuming that decision-makers are always guided by point-valued subjective probabilities, predicts that all uncertainties can, in theory, be insured. Supporters of the standard model argue that the insuring of highly idiosyncratic risks by Lloyd’s of London proves that this is so even in practice. The purpose of this article is to show that Bruno de Finetti, famous as one of the three founders of the subjective approach to probability assumed by the standard model, actually made a theoretical case for uncertainty within the subjectivist approach. We draw on empirical evidence from the practice of underwriters to show how this case may help explain the reluctance of insurers to cover highly uncertain contingencies.
Keywords: risk, uncertainty, insurance, de Finetti
JEL Classification: B21, D81
Suggested Citation: Suggested Citation