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Risk, Choice, and Uncertainty: Three Centuries of Economic Decision-Making

Author(s):Szpiro, George G.
Reviewer(s):Kuchar, Pavel

Published by EH.Net (June 2020)

George G. Szpiro, Risk, Choice, and Uncertainty: Three Centuries of Economic Decision-Making. New York: Columbia University Press, 2020. xii + 250 pp. $32 (cloth), ISBN: 978-0-231-19474-7.

Reviewed for EH.Net by Pavel Kuchar, Department of Economics, University of Bristol.


The main character of George Szpiro’s Risk, Choice, and Uncertainty is the notorious concave utility function familiar to any student of intermediate economics. George Szpiro, a journalist and mathematician, promises to explain how the twenty-first-century economist came to think about choices under risk and uncertainty and he does so with style. While the book is entertaining and informative, it is worth paying as much attention to what it leaves out as to what it decides to include.

The first chapter puts forward the idea that while the utility of wealth increases, it does so and a decreasing rate. The origins of modern decision theory are traced back to Daniel Bernoulli and his discovery that people are generally averse to risk and are willing to pay for eliminating it. This is one of the consequences of the concave character of the utility function that maps wealth on some measure of happiness. Chapter 2 examines the “self evident truth” that more is better only to add in chapter 3 that the utility of wealth increases at a decreasing rate. While the author traces these principles back to Jeremy Bentham’s “felicific calculus,” the reader also gets to meet Simon Laplace, a French polymath who contributed to the mathematization of decision theory, and learn about the Weber–Fechner psychophysics of the late nineteenth century.

The second part of the book focuses on the mathematization of the science of wealth. In the very long chapter 4, Szpiro introduces the “Marginalist Triumvirate” of William Stanley Jevons, Léon Walras, and Carl Menger who would independently help incorporate the principle of marginalism into political economy. Szpiro suggests that the most significant innovation of the marginal revolution was the idea that “decision-makers strive to maximize their total utility” (p. 100). I find this generalization to be problematic. Szpiro often presents unjustified assertions bordering with caricatures. For instance, about the German-speaking ambassador of the Marginalist Triumvirate he writes: “Menger’s conviction that historical data give no indication as to how the economy works, and that it is therefore futile to design economic institutions and set up regulations, appeals to laissez-faire enthusiasts” (p. 101). Szpiro should know better that Menger was convinced that the primary task of economists is to contribute to the improvement of institutions (and laws) and that governments can often improve institutions that emerge spontaneously. This is not the only blunder the reader gets to find in the book.

A very brief chapter 5 discusses the often-overlooked precursors of the so-called marginal revolution. Chapter 6 then moves on into the twentieth century introducing the reader to the Cambridge philosopher and mathematician Frank Ramsey who, Szpiro writes, thought that humans must be rational and consistent in their personal beliefs. Szpiro advertises that the rest of his book will show how economists got to realize that this is often not the case. But not to get ahead of ourselves!

In chapter 7 the reader gets to meet John von Neumann and Oskar Morgenstern while learning about the procedural definition of economic rationality according to which individuals are rational only if they abide by the four axioms of completeness, transitivity, continuity and independence of irrelevant alternatives. Szpiro correctly observes that the Theory of Games written by von Neumann and Morgenstern (1944) was a significant break with conventional economics of the time that would inspire generations of students to think of economic interactions in terms of lotteries and gambles. Chapter 8 introduces Milton Friedman and Leonard Savage discussing the contention that whenever decision-makers choose in the presence of risk, they tend to maximize their expected utility rather than the expected payout.

Unfortunately, the book follows the profession all too closely in muddling the distinction between risk and uncertainty. This problem culminates in chapter 9 when Kenneth Arrow, who was famously unwilling to address this important distinction, enters the story. The chapter introduces the reader to Arrow’s thesis on the impossibility of utility comparisons between people by way of discussing the Arrow-Pratt measure of risk aversion as a function of wealth. Simply put, we can say that the degree of a person’s risk aversion can be measured by relating it to the premium that individuals are willing to pay to avoid risk. By this point, the difference between risk and uncertainty is completely lost and the terms are used interchangeably.

Part 3 takes the reader on a sightseeing tour through the suburbs of economic theory that take on board ideas imported from cognitive science and psychology. Chapter 10 introduces the reader to Maurice Allais and Daniel Ellsberg who would come to show (against Ramsey and Savage) that subjective probabilities often do not add up and that choices are generally not independent of irrelevant alternatives. Szpiro shows how realizing that people behave in ways that are inconsistent with expected utility theory made way for the introduction of bounded rationality into economics. In chapter 11 we thus get to meet Herbert Simon who taught economists that in view of an option paralysis, people tend to use shortcuts and rules of thumb (heuristics).

Following Simon, in chapter 12, Daniel Kahneman and Amos Tversky enter the debate and Szpiro informs the reader about their finding that heuristics lead to systematic and predictable errors that lead people astray. Chapter 13 concludes the book by way of introducing Richard Thaler’s claim that because in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory, economists will in fact make systematic errors in predicting behavior. Here the book comes to a somewhat frustrating and highly unsatisfactory halt by suggesting that that while Simon introduced economics to the theory of bounded rationality, and as Kahneman and Tversky explained what the bounds are by exploring the systematic biases, Thaler would manage to incorporate the psychology of decision-making into economic models of behavior. This conclusion is simplistic at best and misleading at the worst.

While Szpiro tells a highly engaging and informative story about the discipline that mostly purged true uncertainty from its textbooks, he does so unreflectively. The lack of reflection is apparent from the illustration of Kahneman and Tversky’s concept of framing. Szpiro asks the reader to “imagine that the U.S. is preparing for the outbreak of an unusual Asian disease which is expected to kill 600 people” while presenting the reader with two programs one of which is “uncertain” in that if chosen, people would be “risk taking” (p. 198) by facing certain payoffs with certain probabilities. The problem is — as Michael J. Ryan, the Executive Director of the World Health Organization’s Health Emergencies Programme, recently pointed out — that we often find ourselves in situations where “there are no numbers that say if this number is this then you do that” (WHO 2020). After all, Frank Knight (1921) and John Maynard Keynes (1936, 1937) reminded us that not all decisions have the character of a lottery. The lack of reflection on when and how reducing true uncertainty to calculable risk took place in economics is, in my opinion, a serious omission of the otherwise excellent book.


Keynes, John Maynard (1937). “The General Theory of Employment.” Quarterly Journal of Economics, 51(2), 209–23.

Keynes, John Maynard (1978). The Collected Writings of John Maynard Keynes: Volume 7: The General Theory. Elizabeth Johnson and Donald Moggridge, editors. Royal Economic Society.

Knight, Frank H. (1921). Risk, Uncertainty and Profit. Houghton Mifflin.

von Neumann, John and Oskar Morgenstern (1944). Theory of Games and Economic Behavior. Princeton, Princeton University Press.

World Health Organization, “Transcript of COVID-19 Virtual Press Conference,” April 6, 2020, 00:37:45,


Pavel Kuchar’s recent paper “Lachmann and Shackle: On the Joint Production of Interpretation Instruments” (coauthored with Erwin Dekker), was awarded the 2019 Warren Samuels Prize for Interdisciplinary Research in the History of Economic Thought and Methodology.

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII