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Islamic Banking and Finance

New Perspectives on Profit Sharing and Risk

Edited by Munawar Iqbal and David T. Llewellyn

Islamic Banking and Finance discusses Islamic financial theory and practice, and focuses on the opportunities offered by Islamic finance as an alternative method of financial intermediation. Key features of profit-sharing (as opposed to debt-based) contracts are highlighted, and the ways in which they can facilitate improved efficiency and stability of a financial system are explored.
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Chapter 2: Decision-making under uncertainty: an Islamic perspective

Sami Ibrahim Al-Suwailem


Sami Ibrahim Al-Suwailem Although theories of choice tend to treat gambling as a prototypic situation of decision-making under risk, decision-makers distinguish between ‘risk-taking’ and gambling, saying that while they should take risks, they should never gamble. They react to variability more by trying actively to avoid it or control it than by treating it as a trade-off with expected value in making a choice. March (1994, p. 54) 1. INTRODUCTION Textbook presentation of decision-making under uncertainty does not distinguish between investment and gambling. ‘We structure the uncertainty facing an agent by interpreting risky situations as gambles’ (Jehle, 1991, p. 193). Writers start with how an entrepreneur chooses among different investment projects and end up with the lottery ticket as a ‘concrete example’ of the problem (for example Sinn, 1983, pp. 4–5). After defining a lottery to be a prize received with a given probability, Varian (1992, p. 172) writes: ‘Most situations involving behaviour under risk can be put into this lottery framework.’ Allais (1976) reports that he started analysing random choice by ‘thinking about a method for successful race-course betting, based on the use of newspaper forecasts’ (p. 445). Thus decision-making under uncertainty is viewed as choosing among lotteries. Chance and skill appear to be treated equally in this framework. It is not clear how gambling differs from entrepreneurship, and why taking a risk in some instances is praised and in others blamed. Studies on decision-making under uncertainty from an Islamic perspective are quite rare. Further, despite the central...

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