De Finetti was Right: Probability Does Not Exist

authors: Robert F. Nau year: 2001 See in Zotero

Literature Notes

Nau defends De Finetti’s idea that probability doesn’t exist. He takes this further to say that “true” subjective probabilities that exist for a decision maker don’t exist based on a pure utility basis. Thus, beliefs (probabilities) and values cannot be disentangled.

Some of the efforts of economists (such as Savage, von Neumann and Morgenstern) to separate beliefs/ probabilities from money in the form of utility are based on some flimsy arguments such as allowing a person to pick from impossible counterfactual possibilities (like spending time with a dead spouse), or from trying to abstract a person from the world they live in - creating abstract ‘consequences’ from choices.

These efforts (which were already on flimsy standing from the start) also end up being operationally useless. Even if probabilities and preferences were extracted in ‘utils’, those would need to be carried out with some combination of purchases which would (1) change the market (2) depend on other random variables like the price/availability - which would necessarily change the probability distribution.

Nau also argues that ‘true’ probabilities are unecessary since using the fully subjective, money dependent version gives us many of the same results found in finance like the Fundamental Theory of Asset Pricing. Plus, the insights are actionable since they are based on theoretical bets that could be placed in the real world.