Econometrica: Apr, 1957, Volume 25, Issue 2

A Note on Certainty Equivalence in Dynamic Planning

https://doi.org/0012-9682(195704)25:2<346:ANOCEI>2.0.CO;2-Q
p. 346-349

H. Theil

According to the static theory of decision-making under uncertainty, the policy maker will take that action that maximizes expected utility. In the dynamic theory several consecutive periods play a role, each of which is characterized by a certain action. The policy maker will then choose a maximizing strategy (i.e., a rule according to which all successive actions are determined by the information which is available at the time when the action has to be taken). This note is confined to the action in the first period of such a strategy. It is shown that, under certain conditions, the first-period action of the strategy which maximizes expected utility is identical with that of the strategy which neglects the uncertainty problem by maximizing utility under the condition that all uncertain elements are equal to their mean values.