Information and Randomness

Abstract

In the previous chapter, one-period models were investigated. In Chapter 9 we will turn to a more general setting allowing for economic activity to take place also at intermediate dates between today and the investment horizonT.Before taking that step, however, we will need to introduce some additional material on probability theory. This material deals with the way in which the outcome of a random experiment manifests itself to us or, more precisely, with the level of detail in which information on the outcome of a random experiment is revealed to us. This is particularly important when modelling the fact that with the passage of time we learn more and more about the world we live in. This is also the natural setting in which to introduce the notion of independence, one of the central concepts in probability theory.