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92 CHAPTER 2 From: Jehle, G. and P. Reny, Advanced Microeconomic Theory, 2nd. ed., Addison Wesley Longman, 2001. 2.4 Uncertainty Until now, we have assumed that decision makers act in a world of absolute cer- tainty. The consumer knows the prices of all commodities and knows that any fea- sible consumption bundle can be obtained with certainty. Clearly, economic agents in the real world cannot always operate under such pleasant conditions. Many eco- nomic decisions contain some element of uncertainty. When buying an automobile, for example, the consumer must consider the future price of gasoline, expenditure on repairs, and the resale value of the car several years later–none of which is known with certainty at the time of the decision. Decisions like this involve uncer- tainty about the outcome of the choice that’s made. Whereas the decision maker may know the probabilities of different possible outcomes, the final result of the decision cannot be known until it occurs. At first glance, uncertainty may seem an intractable problem, yet economic theory has much to contribute. The principal analytical approach to uncertainty is based on the pathbreaking work of von Neumann and Morgenstern (1944). 2.4.1 PREFERENCES Earlier in the text, the consumer was assumed to have a preference relation over all consu