Augustin Cournot: Modelling Economics
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Augustin Cournot: Modelling Economics

Edited by Jean-Philippe Touffut

From his earliest publications, Cournot broke from tradition with his predecessors in applying mathematical modelling to the social sphere. Consequently, he was the first to affirm the mathematization of social phenomena as an essential principle. The fecundity of Cournot’s works stems not only from this departure, but also from a richness that irrigated the social sciences of the twentieth century. In this collection, the contributors – including two Nobel laureates in economics – highlight Cournot’s profound innovativeness and continued relevance in the areas of industrial economics, mathematical economics, market competition, game theory and epistemology of probability and statistics. Each of the seven authors reminds us of the force and modernity of Cournot’s thought as a mathematician, historian of the sciences, philosopher and, not least, as an economist.
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Chapter 4: From Cournot’s Principle to Market Efficiency

Glenn Shafer


1 Glenn Shafer Introduction Cournot’s principle says that an event of small or zero probability singled out in advance will not happen. From the turn of the twentieth century through the 1950s, many mathematicians, including Chuprov, Borel, Fréchet, Lévy and Kolmogorov, saw this principle as fundamental to the application and meaning of probability.2 In their view, a probability model gains empirical content only when it rules out an event by assigning it small or zero probability. In the 1960s, when probability theory was gaining in importance in economics, and especially finance, Cournot’s principle was no longer so widely accepted. In fact, the principle had almost disappeared with those who had espoused it in the first half of the twentieth century. In this chapter, I argue that its disappearance entailed a loss of clarity in the interpretation of probability, which accounts in part for the high level of confusion in initial formulations of the efficient-markets hypothesis. The game-theoretic framework for probability (Shafer and Vovk, 2001) revives Cournot’s principle in a form directly relevant to markets. In this framework, Cournot’s principle is equivalent to saying that a strategy for placing bets without risking bankruptcy will not multiply the bettor’s capital by a large or infinite factor. It can therefore be applied directly to strategies for exploiting market prices without assuming the existence of meaningful probability distributions related to these prices. The claim that an investor cannot make a lot of money using public information is part of the efficient-markets hypothesis...

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