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

See all articles by Alberto Feduzi

Alberto Feduzi

SOAS University of London; University of Rome III - Department of Business Studies; University of Cambridge

Jochen Runde

University of Cambridge - Judge Business School

Carlo Zappia

University of Siena - Department of Economics and Statistics

Date Written: September 22, 2011

Abstract

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

Feduzi, Alberto and Runde, Jochen and Zappia, Carlo, De Finetti on the Insurance of Risks and Uncertainties (September 22, 2011). British Journal of the Philosophy of Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1932067

Alberto Feduzi (Contact Author)

SOAS University of London ( email )

Thornhaugh Street
Russell Square
London, WC1H 0XG
United Kingdom

University of Rome III - Department of Business Studies ( email )

Department of Economics
Via Silvio D'Amico 77
Roma, RM 00145
Italy

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Jochen Runde

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Carlo Zappia

University of Siena - Department of Economics and Statistics ( email )

Piazza San Francesco 7
Siena, Siena 53100
Italy

HOME PAGE: http://docenti.unisi.it/carlozappia/

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