The value of certainty

Almost a decade ago, many investors were afraid of the collapse of the Eurozone following the European supreme crisis; however, since th ECB and the German chancellor firmly supported the Eurozone and made a statement that they would do whatever necessary to keep the Eurozone, the fear in the market disappeared almost immediately. This is the power of certainty. Of course, some people made a gain due to this certainty announcement and some made a loss. 

Certainty has a value, and it is often calculated by measuring how much an individual is willing to pay to avoid a potential risk. In the real world, the prices of insurance could be seen as the market prices for certain uncertainties, for example, the value for paying for possible car accidents. So we pass our uncertainties to insurance companies, and the insurance companies also pass their uncertainties to others, so they find reinsurance companies. After several steps of insurance, the uncertainties do not disappear, they spread among the entire population. The idea is while we spread uncertainties wide enough, each individual bear less uncertainty. Although the prices of insurance are still the values of uncertainties, individuals bear more uncertainties than they actually realize. They do not only bear uncertainties that they want to pay insurances on or are willing to bear, they also bear the exogenous uncertainties due to the results of the uncertainty pooling by the insurance sector. This is the individual level of certainty value.

There is an aggregate value of uncertainty. If we assume there are always some people betting against all available states and everyone involves in the betting, then the total aggregate returns are unaffected by uncertainties, but the standard deviation changes due to uncertainties. However, from a longer time, the aggregate returns could change due to uncertainties, when we assume the marginal propensities of investment and consumption are diminishing, it means that the side which makes a loss due to uncertainties potentially produce more values in the economy than the side which makes a gain due to uncertainties actually produces in the economy, and the production gap is the value of certainty.