Financial markets and Keynes’s long-term expectations

This paper presents an intuitive way to represent Keynes’s theory of expectations and its implications for financial markets. Further to a suggestion by Ellsberg, a coherent expectational function for the valuation of assets under Keynesian uncertainty is derived. By following the thread that goes from the non-numerical probabilities of the Treatise on Probability to the expectations of the General Theory, this paper suggests that a function accounting for Keynesian expectations can be modelled by using a class of the so-called ε-contaminated probability priors, where the parameter ε is suggestive of the quality of information about the relevant odds.