Journal Article

De Finetti on the Insurance of Risks and Uncertainties

Alberto Feduzi, Jochen Runde and Carlo Zappia

in The British Journal for the Philosophy of Science

Published on behalf of British Society for the Philosophy of Science

Volume 63, issue 2, pages 329-356
Published in print June 2012 | ISSN: 0007-0882
Published online September 2011 | e-ISSN: 1464-3537 | DOI: http://dx.doi.org/10.1093/bjps/axr028
De Finetti on the Insurance of Risks and Uncertainties

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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 founding fathers 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.

1Introduction

2Knight and Keynes on the Philosophy of Unknown Probabilities and Lloyd's of London

  2.1Knight

  2.2Keynes

3Insuring Unique Events: The Subjectivist Viewpoint as Represented by de Finetti

4The ‘Philosophy’ of Practitioners

5De Finetti on Uncertainty in Knight and Keynes and on Insurability

  5.1De Finetti on Knight

  5.2De Finetti on Keynes

6Empirical Evidence on Insurance Under Ambiguity

7Conclusion

Journal Article.  11778 words.  Illustrated.

Subjects: Philosophy of Science ; Science and Mathematics

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