Beyond Keynes, Volume One
Edited by Shelia C. Dow and John Hillard
Chapter 10: Speculation and reasonableness: a non-Bayesian theory of rationality
Anna Carabelli1 I INTRODUCTION In the recent discussion on ﬁnancial markets two main currents have crossed. One revives Keynes’s discussion on speculation and liquidity preference and the connection between these concepts and uncertainty and probability in A Treatise on Probability (TP). The other derives from Bayesian theory and focuses on situations which generate paradoxes and anomalies of rational behaviour in ﬁnancial markets considered ‘eﬃcient’, namely situations which give rise to situations of uncertainty à la Keynes, Knight and Shackle. The ﬁrst current analyses the rationality or irrationality of speculative behaviour and liquidity preference and the role of conventions in ﬁnancial markets. In various ways this opposes the explanation of ﬁnancial markets as eﬃcient markets and reconnects with Victoria Chick’s idea that Keynes’s liquidity and speculation ﬁnd no place in Keynesian theory or in Tobin who, in Chick’s view, reduces uncertainty to calculable risk (Chick, 1983: 214–16). These studies are also linked to a Post Keynesian view of uncertainty based upon non-measurable probabilities. Many authors have recently analysed Keynes’s contribution to the analysis of ﬁnancial markets – often in a critical manner. These include Cottrell, Davis, Lawlor, Mini, Pratten, Runde and Winslow and are all connected to the discussion of the role and relevance of TP in the interpretation of Keynes’s method in economics. They raise two main questions pertinent to this paper: in the General Theory, is Keynes adopting a subjectivist Bayesian probability or a logical probability in line with the TP? Secondly, is he defending a notion of...
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