Probability and Neoclassical Uncertainty

The chapter is organised in two sections. The first part of the chapter is dedicated to the theories of probability. I briefly present the classical and frequency theory of probability. Then I turn to the logical theory of probability, which points to the intersection of the theory of probability with ethics, logic and the theory of knowledge. Finally, I turn, based on Ramsey’s criticisms on the logical theory of probability, to the subjective theory of probability, which is the fundament for the Neoclassical Uncertainty Paradigm. The emergence and development of this Paradigm is the subject of the second part of this chapter. I delineate the evolution of the paradigm based on the theories of expected utility and rational expectations. In the last section of this part I show the actual relevance of the Neoclassical Uncertainty Paradigm for Modern Economics with examples from finance and macroeconomics.