Title

Uncertainty in economics and the application of fuzzy

logic in contract laws
Author(s) Chan, Wing-kin, Louis; sl8Pe
Citation
Issue Date 2003
URL http://hdl.handle.net/10722/56123
Rights
The author retains all proprietary rights, (such as patent
rights) and the right to use in future works.
Uncer t ai nt y in Economics and t he
Appl i cat i on of Fuzzy Logic in
Cont ract Laws
Louis Chan Wing Kin
August 18, 2003
ABSTRACT
In this paper, I attempt to fuzzify the judicial process by realizing the fact
that some legal concepts are fuzzy in nature, meaning that they are not
something with clear-cut boundary or definition. Under the currect legal
system in force in Hong Kong - the common law system, judges, plaintiffs
and defendants process like defuzzifiers who take all the relevant fuzzy legal
concepts into consideration so as to come out with some legal decisions.
By utilizing the doctrine of precedent or 'stare decisis', they can project the
expected duration and the result of litigation. I will show also the lawmakers'
intention in minimizing the possible fuzziness which is positively related to
the costs of information and how fuzziness can be compared and ranked
under different cases. Finally, I will conclude by showing that default rules
in contract laws are serving exactly the purpose of minimizing transaction
costs in contract formation by reducing the fuzziness in the judicial process.
DECLARATION
I declare that this thesis represents my own work, except where due ac-
knowledge is made, and that it has not been previously included in a thesis,
dissertation or report submitted to this University or to any other institution
for a degree, diploma or other qualifications.
Name: Chan Wing Kin
University No: 1998010118
Signature:
2
ACKNOWLEDGEMENTS
First and foremost, I would like to thank Dr. Joe Chan, to whom I own my
biggest intellectual debt. This thesis could not have been completed without
his many insightful suggestions and criticisms and his unfailing support and
encouragement. He introduced me to many numerical techniques, got me
started on the empirical studies, and made useful comments on various parts
of the thesis.
I am also grateful to Mr. Alex Shing for kindly agreeing to act as an editor
for my thesis and generously sharing his time and academic experience and
human capital. Discussions with him, either formally or informally, inspired
me a lot. Any remaining errors are exclusively mine.
Special thanks are due to Mr. Steven Ho, Mr. Ivan Tse, Ms. Ng Ha Fung
for their useful and interesting comments.
Last but not least, I am thankful to my family and Ms. Eriko Chan for their
spiritual support.
3
Introduction
Economics and law always work together, no matter from the delineation
and delimitation of property rights which forms the basis of any kinds of
exchange, or to the litigation of breaches of contracts in courts. Economists
assist lawmakers in justifying proposed rules and pursuits of efficiency and
welfare maximization. Lawmakers, on the other hand, help economists in
explaining and predicting human behaviour by forming the rules of the game
for different economic agents to play with.
However, the reality is too complex that many legal concepts cannot be
defined in an exact manner, or in other words, they are fuzzy in nature. In
this paper, I will attempt to fuzzify the judicial process by realizing the fact
that some legal concepts are indeed, fuzzy in nature, meaning that they are
not something with clear-cut boundary or definition. And see how this could
help the judges, plaintiffs and defendants decide their legal actions.
This article has 4 sections. Section 1, reviews briefly the development of the
analysis of economic behaviour under uncertainty. Section 2, introduces the
fuzzy set theory and its basic operations, more importantly, the differences
between the fuzzy set theory and the traditional classical set theory. Section
3, discusses the doctrine of precedents and the way it assists judges, plaintiffs
and defendants in making decisions of resolving legal disputes. An applica-
tion of the fuzzy set theory to the contract law will be presented through a
hypothetical example in which the concept of a 'valid' contract is re-defined
via the fuzzy set theory. Section 4, illustrates the functions of default rules
in reducing fuzziness and transaction cost in contract formation.
4
1. Uncertainty in the history of economic thought
The concept of probability has been widely used in economics. It is the fun-
damental building block in the mainstream analysis of economic behaviour
under uncertainty. Despite its importance and widespread use in economics,
the concept of probability retains an essential vagueness. Economists make
much use of the powerful logical calculus of probability but, beyond the ax-
iomatic definition, there often lies considerable ambiguity as to what prob-
ability represents empirically. Probability may be interpreted as a relative
frequency or as a degree of belief or something in between. Without a clear
empirical interpretation of probability it is unclear how economic theories
using the probability calculus can be given any explanatory significance. In
this section, I will briefly review the development of uncertainty in economic
thought.
The Expected Utility Hypothesis
The expected utility hypothesis originates from Daniel Bernoulli's (1738) so-
lution to the St. Petersburg Paradox
2
in 1713 by Nicholas Bernoulli. The
Paradox challenges the old idea that people value random ventures according
to its expected return. The Paradox is like that: a fair coin will be tossed
until a head appears; if the first head appears on the nth toss, then the payoff
is 2
n
. The paradox is that the expected retun is infinite
References: M. Blaug 'Economic theory in retrospect', 5th ed., Cambridge University
Press, (1997) and 'The History of Economic Thought Website', Retrieved 23 March 2003,
from http://homepage.newschool.edu/het.
2
Economists including Frank Knight and John Maynard Keynes utilized as illustration
this Paradox in their analysis of risk and uncertainty.
5
Bernoulli's solution involved two revolutionary ideas: the diminishing marginal
utility and the expected utility. He assumed diminishing marginal utility such
that people's utility from wealth, u(w) is not linearly related to wealth (w)
but rather increases at a decreasing rate, that is u'(w) > 0 and u"(w) <
0. Moreover, he argued that an agent's valuation of a risky venture is not
the expected return of that venture, but rather the expected utility from it.
Assuming zero endowment, the value of the game to an agent is finite
3
due
to the assumption of diminishing marginal utility.
3
Note that there exists sequences of payoffs which will give infinite expected value so
that the expected utility will also be infinite, as pointed out in 1934 by Karl Menger.
6
As a result, by Bernoulli's logic, the valuation of any risky venture takes the
following expected utility, where X is the set of possible outcomes, p(x) is the
probability of a particular outcome xX and u: X > R is a utility function
over outcomes.
Axiomatization of the Expected Utility Hypothesis
In 1944, John von Neumann and Oskar Morgenstern attempted to axiomatize
this expected utility hypothesis in terms of agent's preferences over lotteries
4
references. They started from the valuation of a compound lottery which is
a lottery that yields another lottery as prizes.
Let denote an outcome belonging to a set of outcomes, denote
the probability of outcome occuring
Moreover, as the set of probability measures on X.
A particular lottery Z with two possible outcomes: where 50% probability, it
yields a ticket for another lottery A, while with another 50% probability, it
yields a ticket for a different lottery B, can be represented by
where A and B are the lotteries which serve as outcomes of the lottery, Z, the
agent is playing. In general, a compound lottery is a set of K simple lotteries
that are compounded by probabilities
so that it indicates lottery pk with probability .
Thus the compound lottery Z is of the form:
and it can even be reduced to a simple lottery
which can be interpreted as the probability Xi^X occuring.
They further agrued that if an agent has preferences defined over these lot-
teries, then there exists a utility function that assigns a util-
ity to every lottery that represents these preferences, and in other
4
Reference: 'Theory of Games and Economic Behaviour', Princeton University Press.
(1944)
7
words, they argued that agents have preferences over lotteries but not over
the outcomes. However, if lotteries are merely distributions, it might not be
reasonable to say that an agent would 'prefer' one particular distribution to
another!
After the axiomatization of the expected utility theory, von Neumann and
Morgenstern in 1953 showed that it is possible to characterize agents' pref-
erences among risky alternatives under a set of specific axioms governing the
preference of the agents.
Suppose there is a lottery that pays x1 with probability p1 and x
2
with
probability 1 - P1. Let u(x) be the utility function and set the price of good
to $1. von Neumann and Morgenstern claimed that an agent's preference
among such a lottery can be expressed as the expected utility of consumption
that the lottery yields, that is, . And, in general,
this expected utility of the lottery E[u(x)] is not equal to the utility of the
expected value of the lottery u(E[x]). More precisely, if an agent perfers the
certain outcome of the expected value to the lottery, u(E[x]) > E[u(x)], then
he is said to be risk-averse. If an agent perfers the lottery to the certain
outcome of the expected value, u(E[x]) < E[u(x)], then he is said to be risk-
loving. And if an agent is indifferent between the lottery and the certain
outcome of the expected value, u(E[x]) = E[u(x)], then he is said to be risk-
neutral.
In fact, von Neumann and Morgenstern have followed the classical view that
randomness and probabilities 'exist' inherently in Nature since in their anal-
ysis probabilities are assumed to be 'objective' or exogenously given by "Na-
8
ture" and therefore cannot be altered by the actions of the agents. Underlying
the classical view of uncertainty is the 'principle of non-sufficient reason'
5
',
which states that, equal probabilities must be assigned to each of serveral
outcomes if there is an absence of positive ground for assigning unequal ones.
5
Keynes has presented his criticism on this classical notion in chapter 4 of this 'Treatise
on Probability' where he called it the 'principle of indifference.'
9
The Relative Frequency Approach
Due to the deficiencies in the above classical view, Richard von Mises has
developed in 1928, another paradigm, namely, the 'relative frequency'. The
relative frequentists claim that if an event occurs k times in n identical and
independent trials, provided that the number of trails is arbitrarily large,
then k/n will represent as the 'objective' probability of that event
6
. How-
ever, this relative frequentist approach fails to address events which are 'high
degree unique' such as the outcome of the World War III, for example.
The Revealed Belief Approach
Many statisticians and philosophers have long argued that randomness is
not an objectively measurable phenonomenon but rather a 'knowledge' phe-
nomena, therefore probabilities are indeed as 'epistemological' issue. By this
view, a coin toss is not necessarily characterized by randomness: if one knew
the shape and weight of the coin, the strength of the tosser, the atmospheric
condition of the environment in which the coin is tossed, e t c . , one could
predict if it would be heads or tails with certainty. But, as this information
is commonly unavailable or is too expensive to acquire, it is convenient to as-
sume it is a random event and attach probabilities to heads and tails. In this
sense, probabilities are actually a measure of the lack of knowledge about the
conditions which might affect the outcome of an event, and in other words,
6
It should be noted that this view is, in some sense, closely related to the "law of large
numbers" set out by Jacob Bernoulli in 1713. It states that if an event occurs k times in n
identical and independent trials, provided that the number of trails is arbitrarily large, then
k/ n would be arbitrarily close to the 'objective' probability which exists independently, of
that event.
10
a measure of our beliefs about the event.
Frank P. Ramsey (1926) disagreed on this 'objective' view of probability and
claimed that it is the personal belief that governs probabilities but not the
'knowledge'. However, this "subjectivist" approach makes it impossible to
build a predictive theory of behaviour under uncertainty since if assigned
probabilities are assumed to be subjective, the randomness itself will also
be a subjective phenomenon. In the 1926's paper, he attempted to derive
a theory of behaviour under uncertainty with subjective probabilities. The
basic idea is that subjective probabilities can be inferred from observation
of agents' actions in a random venture in which the agents share the same
knowledge. For instance, suppose an agent faces a gamble with two possible
outcomes, x and y, where x>y, and suppose further that he faces a choice
between two lotteries p and q defined over x and y. In the outset, we do not
know what p and q are composed of, but if an agent chooses p over q, then
we can deduce that he must believe that p assigns a greater probability to
x relative to y, or vice versa.
7
This 'revealed belief approach, however, has
been criticised on its empiricial applicability since a belief cannot be known
in advance unless we observe the choice of the agents. Some economists such
as B. O. Koopman pointed out that subjective probabilities are not necessar-
ily revealed through choice, and even it is the case, they are usually revealed
through intervals rather than some single numerical measures. This view of
probability is sometimes called the 'intuitionists' which held that probabili-
ties are directly derived from intuition prior to any experiment.
7
It is similar to the idea of the "revealed preference" in modern day microeconomics.
11
The State-Preference Approach
Kenneth J. Arrow and Gerard Debreu held this 'intuitionist' view and devel-
oped the "state-preference" approach which has since become the dominant
method of incorporating uncertainty in general equilibrium models where
payoffs are not merely money but actual bundles of goods.
The main idea of the "state-preference" approach is that it reduces choices
under uncertainty to a conventional choice problem by altering the commod-
ity structure. The state-preference approach assumed that preferences are
formed over bundles of state-contingent commodities. The basic proposition
of the state-preference approach is that commodities can be differentiated by
their "states of nature". It means that two identical goods will be treated
differently and command different prices if they exist under different states.
More precisely, with a set (S) of mutully exclusive "state of nature (s;)",
where S;S V i=l...n, one can index every commodity by the state of nature
when it is delivered and thus form a set of "state-contingent" markets.
This approach has been extensively applied to insurance industry since the
insurance contract is highly 'state-contingent' in the sense that it pays the
insured indemnities when a insured event occurs. The simplest model is
a two-state model with a fixed insurance premium per dollar of coverage,
7. The set of states is where H is a state when an accident
happens, and NH is a state when no accidents happens. Let endowed income
be where U>H is the wealth when an accident happens and
the otherwise, moreover, such that the agent will suffer a
loss when an accident happens. Assuming there exists a state-independent
12
utility function over payoffs as follow:
this gives the expected utility of the agent with the initial endowment, where
and denote the subjective probability that an accident will happen
and the otherwise respectively.
A "fair" insurance contract can then be formed as where
denotes the insurance premium when no accident happens and denotes the
indemnity net of the premium when an accident happens. As a result, if an
agent purchases the insurance contract, then her expected utility
will be as follows:
It is worth noting that, both are not constants, but variables and
that depend on the agent's choice of the amount of insurance coverage.
Assuming that is the insurance premium per dollar
of coverage. The idemnity net of premium, will be equal to
that is the amount of coverage minus the insurance premium.
The expected profit of the insurance company will be:
Under perfect competition, this expected profit, IT will be equal to zero.
13
After rearranging the terms:
(1)
the ratio of insurance payment to the net indemnity can be shown to be equal
to the subjective odds of the accident.
By substituting equation (1) becomes:
and it implies that In other words, it implies that the insurance
premium per dollar of coverage is equal to the subjective probability of the
accident.
The maximization problem facing the agent will become as follows:
(3)
where the objective of the agent is to choose the amount of insurance coverage
C, given the fixed insurance premium per dollar of coverage, 7.
The first order condition of this maximization:
14
(2)
The solution of this maximization problem can be rearranged to:
given that the insurance is 'fair', that is equation (5) can be reduced
further to:
(6)
it implies
This means that an agent facing a fair insurance scheme will choose to be
fully insured against the accident such that the entire loss from the accident
will be recovered. However, this result applies only for limiting cases in which
the condition for fair insurance, 7 = 7r
s
, holds. Whenever this condition fails
to hold, the result will be different, and the agent might not choose to be fully
insured against the accident, but rather depending on her attitude towards
risk.
The development of the theory of choice under uncertainty after the Second
World War was a success story resting 'on solid axiomatic foundations ...
[with] important breakthroughs in the analytic of risk, risk aversion and
their application to economic issues'
8
. It reflects the mainstream view that
the concept of 'uncertainty' has been closedly related to that of probabilistic
risk.
8
Journal of Economic Perspectives, Vol. 1, (1987) p.121
15
(5)
In fact, Adam Smith was the first classical economist to use the word "un-
certainty" interchangeably with probability. In his discussion of wage dif-
ferentials in 'the liberal professions' such as lawyers, Smith (1937: pp.106)
indicates that by uncertain he meant the 'probability or improbability of
success'. Alfred Marshall (1961: pp.l35n), on the other hand, agreed that
given the law of diminishing utility, 'gambling is, in the long run, a sure way
to lose utility' for the marginal utility of gaining 100 pounds was less than
the marginal utility of losing pounds. There was nothing uncertain about
the long-run outcome of gambling - only probabilistic risk. In the case of
an equal probability of gain or loss, Marshall indicated that the probabilistic
outcomes could be compared to 'certain' expectations. Therefore, Marshall
did not assign a major role to uncertainty in his analysis.
Beginning in the twentieth century, however, non-mainstream economists in-
cluding Frank Knight and John Maynard Keynes and the Post Keynesians,
based their analysis on an explicit distinction between the concept of uncer-
tainty and probabilistic risk.
16
Risk Versus Uncertainty
According to Frank Knight (Knight,1921: pp.19-20):
Uncertainty must be taken in a sense radically distinct from the
familiar notion of risk from which it has never been properly sep-
arated. The term 'risk' as loosely used in everyday speech and in
economic discourse, really covers two things which, functionally
at least, in their causal relations to the phenomena of economic
organization, are categorically different ... The essential fact is
that 'risk' means in some cases a quantity susceptible of mea-
surement, while at other times it is something distinctly not of
this character; and there are far-reaching and crucial differences
in the bearings of the phenomenon depending on which of the
two is really present and operating ... It will appear that a mea-
surable uncertainty, or 'risk' proper as we shall use the term, is
far different from an immeasurable one that it is not in effect an
uncertainty at all. We shall accordingly restrict the term 'un-
certainty' to cases of the non-quantitative type. It is this ' true'
uncertainty, and not risk, as has been argued, which forms the
valid theory of profit and accounts for the divergence between
actual and theoretical competition.
Uncertainty is distinct from risk. Risk is objectively determined while un-
certainty is subjectively determined. As Frank Knight (1921), observed:
The partical difference between the two categories, risk and un-
17
certainty, is that in the former the distribution of the outcome
in a group of instances is known (either through calculation a
priori or from statistics of past experience, while in the case of
uncertainty this is not true, the reason being in general that it
is impossible to form a group of instances, because the situation
dealt with is in a high degree unique.
In other words, Knight believed that the element of risk in a venture can be
estimated by utilizing objective probabilities, whereas uncertainty cannot be
objectively determined, but only inferred from personal (subjective) experi-
ences, observed (vague) outcomes and imperfect (approximate) knowledge,
with varying degrees of ambiguity and subjectivity.
As a result, since business decisions, to a large extent, hinge on vague and in-
complete knowledge of all existing information while machines requires only
exactness and objectivity; the functions of gathering economic resources and
assuming risk can then be assigned to a mechanical device, while the de-
cision making under uncertainty to an entrepreneur. The entreprenuer not
only surpasses a calculating machine in analyzing incomplete data, but fur-
ther excels over machines in predicting future outcomes involving the firm
and the market. Without possessing exact knowledge, the entrepreneur tries
to consider each relevant and possible future element along with their ef-
fects upon each other. Sometimes, the entrepreneur may need to rely on her
'feeling' or 'intuition'. This is an extension and result of the entrepreneur's
knowledge, expertise, individual characteristics, and the social and psycho-
logical factors which directly or indirectly impact the entrepreneur's envi-
ronment. These factors form the basis of the decision making process under
18
uncertainty. Thus, the entrepreneur can be regarded as an organizer of the
production factors and as the predictor and bearer of risks and uncertainties
associated with her business venture.
This inclusion of uncertainty as a fundamental part of the entrepreneurial
decision making process was also formalized by Frank Knight (1921):
The adventurer has an opinion as to the outcome, within more
or less narrow limits. If he is inclined to make the venture, this
opinion is either in expectation of a certain definite gain or a belief
in the real probability of a larger one. Outside the limits of the
anticipation any other result becomes more and more improbable
in his mind as the amount thought of diverges either eay.
Knight associated risk with either frequentist (statistical) or Bayesian prob-
abilities. Uncertainty was associated only with unique events. To Knight,
an uncertain future is the basis of the existence of business profits.
For Keynes, on the other hand, uncertainty involves situations where decision-
makers believe that no relevant probabilities exist today that can be used as
a basis for scientifically predicting future events. As Keynes indicated, by
uncertainty he did
not mean merely to distinguish what is known for certain from
what is only probable. The game of roulette is not subject, in this
sense to uncertainty ... The sense in which I am using the terms is
t hat . . . there is no scientific basis on which to form any calculable
19
probability whatever. We simply do not know. (Keynes, 1973b:
pp.113)
Back in 1921, in 'Treatise on Probability' (TP), Keynes argues that proba-
bility is an entity of logic, not statistics
9
.
'The terms certain and probable describe the various degree of
rational belief about a proposition which different amounts of
knowledge authorise us to entertain. All propositions are true or
false, but the knowledge we have of them depends on our circum-
stances; [Speaking] of propositions as certain or probable
express strictly a relationship in which they stand to a corpus
of knowledge , and not a characteristic of the propositions in
themselves. A proposition is capable at the same time of vary-
ing degrees of this relationship, depending upon the knowledge
to which it is related, so that it is without significance to call a
proposition probable unless we specify the knowledge to which
we are relating it.' (TP, p.4)
In TP, Keynes proposed a logical theory of probability. The probability
relation takes the following form:
p a/h
where p is the probability of some proposition, a, given the available evi-
dence, h. The probability relation represents the degree of belief that it is
9
'not statistics' means not by observed frequencies
20
rational to hold in a proposition on the basis of the available evidence. To
Keynes, probabilities are a property of the beliefs which agents hold about
the world. In contrast to the relative frequency approach in which proba-
bilities are viewed as long-run relative frequencies that are a property of the
world itself. Moreover, unlike the Bayesians, Keynes treated proabilities as
objective, rather than subjective. More importantly, Keynes permits human
'freewill' to create future outcomes or future states of the world in his analysis
which is truly a revolutionary way of modelling the entrepreneurial market
system which is logically inconsistent with the axioms underlying classical
theories in which the future is exogenously chosen by the 'Nature'.
To Keynes, uncertainty arises when there is more than one hypothesis enter-
ing into expectation. And he argued that economic expectations are 'objec-
tive' in the sense that given the same knowledge, different individuals will
have the same belief about a proposition
10
; and 'subjective' in the sense that
different individuals might have different information sets (knowledge) which
authorize them to entertain different beliefs about a proposition.
11
"In the sense important to logic, probability is not subjective. A
proposition is not probable because we think it so. When once the
facts are given which determine our knowledge, what is probable
or improbable in those circumstances has been fixed objectively,
and is independently of our opinion." (TP, p.4)
10
It is sometimes called the "Harsanyi Doctrine" or "common prior" assumption.
11
It is different from the rational expectation hypothesis in which both the agents and
the government authorities know the (same) underlying economic system.
21
In fact, it is very similar to the idea of fuzzy logic
12
in modern decision the-
ory. The original idea of fuzzy logic is attributed to Lotfi Zadeh in 1965.
The main idea lies in the concept of fuzzy sets which are defined by specific
membership functions. Let X denote a universal set, and \XA the membership
function by which the fuzzy set A is defined. Stated in canonical form:
The sum of the membership grades is not necessarily one. The membership
function does not describe a probability (random) distribution. It describes a
possibility (non-random, subjective) distribution. An occurrence is possible
does not mean it is probable, however, if an element is impossible then it is
also improbable.
Those different hypothesis can be seen as different elements belonging to
different crisp sets, through assigning each of the hypothesis with different
membership values, by the fuzzy set theory, a newly-defined fuzzy set is then
formed to take all of them into consideration. An entrepreneur who entertains
various hypothesis over the expectation on next year's interest rate, can form
a fuzzy set describing for example, 'approximately 10 per cent', so as to
take into account all possible situations authorized by his own knowledge
or information. Obviously, this fuzzy set contains a subjective evaluation
on how the interest rate will change which are based on the entrepreneur's
own knowledge or information. But, by so doing, one can formalize those
expectations in a more realistic manner. Undoubtedly, Keynes recognizes
12
More on fuzzy logic and fuzzy sets theory will be discussed in the next section.
22
the idea of fuzzy thinking in human decision-making process.
In choosing between alternative actions, Keynes argued that the decision
maker must take into consideration not only the probabilities attached to
each of the different possible outcomes but also the 'goodness' of each out-
come. The mathematical expectation of an action is defined as follows. Let
A represent the degree of 'goodness' of some action. The probability, p, is
the rational degree of belief that the degree of'goodness', A, will be attached
if the action is chosen. The mathematical expectation, E, of the action is
defined as:
E = pA
by which an agent will choose an action to maximize this mathematical
expectation.
Though Keynes agreed that the mathematical expectation had recognized
both the probability and 'goodness' of an action, he was not fully satisfied
with this form of expectation. He presented four specific criticisms against
the mathematical expectation.
Keynes's first criticism on the mathematcial expectation is that it assumes
that the 'goodness' of each outcome is numerically measurable and arith-
metically additive. His second criticism on mathematical expectation is its
requirement that probabilities are numberically measurable, in TP, however
these numerical probabilities are considered as just a small subset of all possi-
ble probabilities. Keynes argued that numerical probabilities had been given
undue attention only because of their potential for mathematical manipu-
23
lation. Keynes believed that most probabilities cannot be measured and
may even be nocomparale or non-existent. It implies that the mathematical
expectation is at most applicable only to a strictly limited class of choice
problems.
His third criticism is that mathematical expectation does not allow the
'weight' of an argument to affect the choice of action. The weight of an
argument is a measure of the evidence, h, on which the proposition, a, is
based, V, and is defined as:
As Keynes considered the 'weight' of as the amount of evidence, so that
when the amount of relevant evidence increases, the weight of an argument
increases. It is worth noting that the weight of an argument is independent
of the probability. As additional relevant evidence is acquired, the weight
increases but the rational degree of belief (probability) may increase, decrease
or remain unchanged. This proposition can be stated in in canonical form:
where hi represents additional relevant evidence.
And Keynes goes on arguing that 'The magnitude of the probability of an
argument depends upon a balance between what may be termed the
favourable and the unfavourable evidence As the relevant evidence at
out disposal increases, the magnitude of the probability of the argument
24
may either increase or decrease, according to the new knowledge strengthens
the unfavourable or the favourable evidence; but something seems to have
increased in either case, - we have a more substantial basis upon which to
rest our conclusion. One may express this by saying that an accession of
new evidence increases the weight of an argument. New evidence will some-
times decrease the probability of an argument, but it will always increase its
weight.' (TP, p.77) Whenever the number of completing hypothesis enter-
ing into expectation formation is reduced, the weight is increased, and by
Keynes's definition, uncertainty is also then reduced.
His final criticism is that mathematical expectation does not take any account
of the 'risk' attached to the choice of any action. Keynes's concept of risk,
R, is defined as follows:
R = p(A - E)
= p(l - p)A
= pqA
= qE
where q = 1-p. Keynes defined risk, R = qE. Keynes interpreted the mathe-
matical expectation, E, as measuring the net immediate sacrifice required in
the hope of gaining the payoff A. In other words, E is the maximum amount
that a risk-neutral agent would be willing to pay for a gamble, (A,0;p, 1-p),
that is payoff A with probability, p, and zero payoff with 1-p, i.e. payoff
A with probability, p, and zero payoff with 1-p. Given that q represents
the probability that the sacrifice is made in vain, it follows that Keynes de-
fined risk as the mathematical expectation of the loss attached to the action.
25
Keynes's notion of risk is a recognition that an agent makes choice not only
depends on expected gain but also expected loss. Most essentially, Keynes
argued that high risk acts as a deterrent to action. As the risk associated
with an action increases, the desirability of that action falls, ceteris paribus.
Keynes illustrated his argument for the importance of risk with reference to
the St. Petersburg paradox (TP, p.349-352): in which Peter engages to pay
Paul one shillings if a head appears at the first toss of a coin, two shillings if
it does not appear until the second, and in general, shillings if no head
appears under the rth toss. Mathematically, the value of Paul's expectation
is if the number of tosses is not in any case to exceed n in all,
and if this restriction is removed. It follows that, Paul should
pay shillings in the first case, and an infinite sum in the second. Nothing,
it is said, could be more paradoxical, and no sane Paul would engage on
these terms even with an honest Peter. The mathematical expectation of
this game is infinite yet it is reasonable that Paul is only willingg to pay a
small stake to play the game.
In recent decades, mainstream economics has associated uncertainty either
with situations where decision-makers possess information regarding their
explict (objective) probabilities or agents form Bayesian subjective probabil-
ities. Most New Classical and New Keynesian models assume the existence of
objective probability distribution functions that represent an external reality.
The ' Nature' will determine the future state of the world that will exist. It
follows that, therefore, that society cannot alter this external reality. Agent's
have no 'free will' to alter their long-run economic future. (Lawson, 1988)
26
The Subjective Probability Theories: The Rational Expectations
Hypothesis
Subjective probability theories imply that although an objective probability
reality exists, decision-makers today do not possess sufficient mental capacity
to 'know' it. Agents can order an exhaustive list of all possible outcomes by
subjective probabilities such that the sum of all these probabilities equals to
one. In the short run, subjective probabilities can be a type of knowledge
that need not match the external reality that is presumed to exist. In the
long run, however, subjective probabilities tend to coverge with objective
probabilities that are a property of an external and unamendable reality. In
the long run, rational agents will make optimal choices. This viewpoint of
probability forms the basis of the rational expectations hypothesis (REH).
The rational expectations hypothesis has been playing an important rule in
modern economic literature. The rational expectation hypothesis specifies
that both the agents and the government authorities know the 'same' under-
lying economic system. It is a technical principle of model construction which
assures nothing more than consistency between an endogenous mechanism
of expectations formation and general equilibrium.
John Muth's hypothesis of rational expectations is a technical
model-building principle, not a distinct, comprehensive macroe-
conomic theory. Recent research utilizing this principle has rein-
forced many of the policy recommendations of Milton Friedman
and other postwar monetarists but has contributed few, if any,
orginal policy proposals. My own research has been concerned al-
27
most exclusively with the attempt to discover a useful theoretical
explanation of business cycles.
13
Robert Lucas and other proponents of rational expectations hypothesis be-
lieve that the most important and reasonable justification for rational ex-
pectations is that it is the only hypothesis of expectations formation which
is compatible with the principles of general equilibrium, as it aspires to be
rigorously based on the maximization of utility and profits. It proves indis-
pensable to extend these principles to the process of expectation formation,
assuming that information, which is a scarce resource, is used in an efficient
way.
The argument works, but all we can say is that economics agents will not
consciously commit ex ante errors of prediction. Similarly, it is undoubt-
edly correct to assert that if economic agents realize ex post that they have
committed errors of prediction they will try to correct them, but is not for
certain that the learning process must rapidly converge towards an equilib-
rium. The equilibrium identified by the hypothesis of rational expectations
should therefore be considered as a transitory equilibrium only. Yet, this
point of view is not compatible with the equilibrium method used by Lu-
cas who utilizes the substantive version of rational expectation which implies
that the 'environment' remains rigidly beyond the reach of any action of con-
trol or transformation on the part of the economic agents. The environment,
in fact, is defined as the whole complex of variables over which economic
agents have no control, but which influences their decisions. An exception is
13
Lucas, R.E., Jr and Sargent, T.J., eds., 1981, Rational Expectations and Econometric
Practice, p. 1-2
28
made only for the authorities who are endowed with the power to modify the
rules of economic policy, which obviously constitute an essential part of the
environment. Therefore a rational agent never makes systematic mistakes
14
,
not only ex ante but also ex post.
15
Nevertheless, since information is scarce and can be acquired only at a cost, it
would be important to know the specific nature of the cost function in order
to see whether rational expectation emerges as the solution of a problem of
constrained maximization. This result should be considered very unlikely,
however. Moreover, we are not sure if economic agents manage to avoid
systematic ex post errors, that depends on the quality and quantity of the
existing information, and on procedures for handling that information
16
.
14
Obviously, Keynes's theory of liquidity preference is inconsistent with the rational
expectations hypothesise, since the underlying substantive rationality refuses to attribute
any economic value to strategic learning.
15
This implies that a rational agent has no economic incentives to avoid systematic
mistakes: strategic learning, which aims to avoid systematic mistakes in order to discover
a strategy more profitable than that adopted so far, would be deprived of any economic
value and would become unintelligible.
16
Frydman and Phelps, eds., 1983
29
2. The Fuzzy Set Theory
The term fuzzy in the sense used in this paper was first introduced in 1962
by Zadeh
17
in a paper concerned with the transition from circuit theory to
system theory in which he called for a "mathematics of fuzzy or cloudy quan-
tities which are not describable in terms of probability distributions". This
revolutionary paper was followed three years later by technical exposition of
just such a mathematics now termed the theory of fuzzy sets.
18
Much of the decision-making in the real world takes places in
an environment in which the goals, the constraints and the con-
sequences of possible actions are not known precisely. To deal
quantitatively with imprecision, we usually employ the concepts
and techniques of probability theory and, more particularly, the
tools provided by decision theory, control theory and information
theory. In so doing, we are tacitly accepting the premise that im-
precision - whatever its nature - can be equated with randomness.
This, in our view, is a questionable assumption. Specifically, our
contention is that there is a need for differentiation between ran-
domness and fuzziness, with the latter being a major source of
imprecision in many decision processes. By fuzziness, we mean
a type of imprecision which is associated with fuzzy sets, that
is, classes in which there is no sharp transition from member-
ship to nonmembership. For example, the class of green objects
is a fuzzy set. So are the classes of objects characterized by such
17
L. A. Zadeh, From Circuit Theory to System Theory", Proceedings of the Institute of
Radio Engineers 50 (1962) 856-865.
18
L. A. Zadeh, Fuzzy Sets", Information and Control 8 (1979) 509-534.
30
commonly used adjectives as large, small, significant, important,
serious, simple, accurate, approximate, etc. Actually, in sharp
contrast to the notion of a class or a set in mathematics, most of
the classes in the real world do not have crisp boundaries which
separate those objects which belong to a class from those which
do not. In this connection, it is important to note that, in the
discourse between humans, fuzzy statements uch as "John is sev-
eral inches taller than Jim," x is "much larger than y," "the stock
market has suffered a sharp decline" convey information despite
the imprecision of the italicized words
19
.
It is worth emphasizing that it is not a statement implying that probability
theory itself is wrong - it suggests only that there are forms of uncertainty
where the probability theory may give an inappropriate representation. The
point is that in the decision process under uncertainty, certain forms of im-
precision occur that are intrinsic to the problem and for which the probability
calculus is inadequate. Bellman and Zadeh give a concise abstract classifi-
cation of these forms of imprecision in terms of "classes in which there is no
sharp transition from membership to nonmembership".
Gaines
20
in his 1981's paper has given an example of a planning situation
where the role of imprecise statements as very accurate representations of
information is apparent:
19
R. E. Bellman and L. A. Zadeh "Decision-making in a Fuzzy Environment" Manage-
ment Science 17 B141-B142 (1970)
2 0
B. R. Gaines, "Logical Foundations for Database Systems", in: E.H. Mamdani and B.
R. eds., Fuzzy reasoning and Its Appications pp.289-308. Academic Press, London. (1981)
31
unwarranted precision can itself be highly misleading since ac-
tions may be taken based on it - "we will deliver 7 parcels each
weighing 15.2 Kilograms at the rear entrance of building 6A on
15th February at 9.03 p.m.", "we will deliver some heavy equip-
ment to your site Saturday evening", and "see you with the goods
over the weekend", may each refer to the same event but are
clearly not interchangeable, i.e., each conveys an exact meaning
that (presumably) properly represents what is to occur. If we
prefer the precision of the first statement it is not for its own
sake but because the tighter tolerances it implies on the actual
situation allow us to plan ahead with greater accuracy and less
use of resources. However, if the third statement really represents
all that can be said it would be ridiculous to replace it with ei-
ther of the previous ones. It would be equally ridiculous to say
nothing. However, even the least precise of the three statements
does provide a basis for planning and action. A key aspect of
executive action is planning under uncertainty and normal lan-
guage provides a means for imprecision to be clearly and exactly
expressed (Gaines [2, p.303])
It is a very precise representation of the situations where people operate and
make decisions in the real world. Any decision theory must also be able to
represent adequately so as to explain and predict agents' behaviour under
real world setting.
Again it is worth noting that this statement is totally independent of any
requirement for precision in the development of science - it does not in itself
32
oppose to the attempts of modelling any decision process as precisely as
possible. As Karl Popper has noted in the context of the philosophy of
science:
both precision and certainty are false ideals. They are impos-
sible to attain, and therefore dangerously misleading if they are
uncritically accepted as guides. The quest for precision is analo-
gous to the quest for certainty, and both should be abandoned. I
do not suggest, of course, that an increase in the precision of say,
a prediction, or even a formulation, may not sometimes be highly
desirable. What I do suggest is that it is always undesirable to
make an effort to increase precision for its own sake especially
linguistic precision - since this usually leads to lack of clarity, and
to a waste of time and effort on preliminaries which often turn
to be useless, because they are bypassed by the real advance of
the subject: one should never try to be more precise than the
problem situation demands (Popper 7, p. 17).
Most of the applications of fuzzy set theory in decision analysis arises through
the interpretation of some forms of imprecise statement as placing a 'possi-
bilistic restriction' on the class of events which satisfy that statement. This
restriction is then represented through a set with graded membership such
that any event has a 'degree of membership' in the set defining the extent
to which it is consistent with the possibilistic restriction. It represents the
human decision processes more closely than the classical set theory in which
only black-or-white logic is allowed.
33
Opponents to the fuzzy set theory, however argue that the imprecision in-
volved is not essential and does not require formal representation. Moreover,
they suspect the need for fuzzy set theory in decision analysis since they
believed that we already have tools to deal with uncertainty and impreci-
sion, namely, the probability calculus. However, examples can be given to
show that the conventional interpretation of probability theory in terms of
likelihoods or frequencies is not appropriate to the kinds of imprecision exem-
plified above. The term green defines a fuzzy set of objects not because the
colour of any one of them varies each time it is examined but because there is
reasonable doubt about whether a borderline case belongs to the set or not.
The parcel delivery example above gives three definitions of the nature of the
event which are increasingly fuzzy only in allowing the deliverer greater and
greater freedom in the class of actions which satisfy his definition. What is
defined is not the probability of an event occurring but the range of 'possible'
events that may occur.
There appears a need for differentiation between randomness and fuzziness,
with the latter being a major source of imprecision in many decision pro-
cesses.
34
2.1 Randomness Versus Fuzziness
Randomness, has to do with uncertainty concerning membership or nonmem-
bership of an object in a non-fuzzy set. It has to do with sets in which there
is a sharp transition from membership to nonmembership, where the grades
of membership can takes on, zero or unity, two values only.
Fuzziness, on the other hand, is a type of imprecision which is associated with
fuzzy sets. It has to do with sets in which there is no sharp transition from
membership to nonmembership, but have grades of membership intermediate
between these two extreme situations. For example, the class of green objects
is a fuzzy set. So are the classes of objects characterized by such commonly
used adjectives as large, small, substantial, significant, important, serious,
simple, accurate, approximate, etc. In fact,, in sharp contrast to the notion
of a class or a set in mathematics, most of the classes in the real world do not
have crisp boundaries which separate those objects which belong to a class
from those which do not.
To illustrate the difference, the fuzzy statement "Investing in Company A
will give you and your family a handsome reward", is imprecise by virtue
of the fuzziness of the terms "handsome reward". On ther other hand, the
statement "The probability that Company is operating at a profit is 0.9" is
a measure of the uncertainty concerning the membership of Company A in
the non-fuzzy set of companies which are operating at a profit.
In fact, the mathematical techniques for dealing with fuzziness are quite dif-
ferent from those of classical probability theory. They are simpler in many
35
aspects because of the fact that the notion of probability measure in prob-
abilty theory corresponds to the simpler notion of membership function in
the theory of fuzziness. Furthermore, the correspondents of a + b and ab,
where a and b are real numbers, become the simpler operation Max(a, b)
and Min(a, b). For this reason, even in those cases in which fuzziness in a
decision process can be simulated by a probabilistic model, it is generally
advantageous to deal with it through the techniques provided by the fuzzy
set theory rather than through the employment of the conceptual framework
of probability theory.
2.2 Basic Fuzzy Set Theory and its Operations
Conversation contains many vague words from everyday gossip as "The
weather is hot" to an economist's statement that "The economic perfor-
mance of Hong Kong will become better in the coming years." Fuzzy sets
were proposed to deal with such vague words and expressions. Fuzzy sets can
handle such vague concepts as "a set of good students" and "people living
close to the poverty line," which are unable to be expressed by conventional
set theory. The words "good" and "close" give ambiguous ideas. These
vague expressions are not allowed in conventional set theory and one has to
define terms exactly like "the set of students whose G.P.A.s are higher than
3.8," or "the set of people whose average monthly family incomes are lower
than $4,000." A calculation of a student's G.P.A. will show if the student
belongs to the former set; and a calculation of a family's monthly income
will show if that family belongs to the latter set, for example. These con-
ventional sets, which are defined exactly, are called "crisp sets" in fuzzy set
36
theory. The question raised above involves the representation of soft and im-
precise information. Zadeh
21
introduced the concept of a fuzzy set in order
to quantitatively represent such information.
In the following sub-sections, I will first present the crisp set theory and
then I will introduce the fuzzy set theory and its various operations. The
applications of the fuzzy set theory to the economics of (contract) law will
be discussed in the next section.
21
L. A. Zadeh, 'Fuzzy Sets', Information and Control 8 (1965), p.338-353
37
2.2.1 Crisp Sets and Characteristic Functions
Let X denote a universal set and X^ denote a characteristic function by which
the crisp set A is defined. The characteristic function X can be defined by
a mapping, stated in canonical form:
It indicates that if the element x belongs to A, X is 1, and if it does not
belong to A, X^ is 0.
In crisp set theory, union, intersection, and complement are defined as follows.
Cri sp Sets
Union of crisp sets A and
Intersection of crisp sets A and
Complement of crisp sets A and
The natural operations on sets, such as the union and intersection, are also
readily defined and White
22
has shown that the definitions used by Zadeh
23
22
R. B. White "The Consistency of the Axiom of Comprehension in the Infinite-valued
Predicate Logic of Lukasiewicz", Journal of Philosophical Logic 8 pp.509-534 (1979)
23
L. A. Zadeh, 'Fuzzy Sets', Information and Control 8 (1965), p.338-353
38
led to a set theory in which the axiom of comprehension, that every predi-
cate defines a set, is consistent and does not lead to the paradoxes in classical
set theory. Indeed, at a former level there are close links between classical
probability theory and fuzzy set theory.
2.2.2 Fuzzy Sets and Membership Functions
Let X denote a universal set and denote a membership function by which
the fuzzy set A is defined. The membership function can be defined by a
mapping, stated in canonical form:
The value of for the fuzzy set A is called the membership value or the
grade of membership of The membership value represents the degree
of x belonging to the fuzzy set A.
It indicates the sum of the membership grades is not necessarily one. The
membership function does not describe a probability (random) distribution.
It describes a possibility (non-random, subjective) distribution. An occur-
rence is possible does not mean it is probable, however, if an element is
impossible then it is also improbable.
In fuzzy set theory, union, intersection, and complement are defined as fol-
lows.
39
Fuzzy Sets
Union of fuzzy sets A and
Intersection of fuzzy sets A and
Complement of fuzzy sets A and
Union of fuzzy sets A and B: union AuB of fuzzy sets A and B is a fuzzy set
denned by the membership function:
Intersection of fuzzy sets A and B: intersection AnB of fuzzy sets A and B
is a fuzzy set defined by the membership function:
Complement of fuzzy set A: complement of fuzzy set A is a fuzzy set
defined by the membership function:
The value of the characteristic functions for crisp sets defined above was ei-
ther 0 or 1 but the membership value of a fuzzy set can be an arbitrary real
value between 0 and 1 as indicated by the membership function above. The
closer the value of to 1, the higher the grade of membership of the
element x in fuzzy set A. If the element x completely belongs to
the fuzzy set A. If , the element x does not belong to A at all.
40
2.2.3 Fuzzy Sets and Possibilistic Values
Zadeh gave a simple example of this difference between probabilistic uncer-
tainty (Crisp Sets) and possibilistic imprecision (Fuzzy Sets) by considering
the statement: "Hans ate X eggs for breakfast." He notes:
We may associate a possibility distribution with X by interpreting
F(u) as the degree of ease with which Hans can eat (u) eggs. We
may also associate a probability distribution with X by interpret-
ing P(u) as the probability of Hans eating u eggs for breakfast.
Assuming that we employ some explicit or implicit criterion for
assessing the degree of ease with which Hans can eat u eggs for
breakfast, the values of F(u) and P(u) might be as shown:
We observe that, whereas the possibility that Hans may eat 3
eggs for breakfast is 1, the probability that he may do might be
quite small, e.g. 0.1. Thus, a high degree of possibility does
not imply a high degree of probability, nor does a low degree of
probability imply a low degree of possibility. However, if an event
is impossible, it is bound to be improbable.
24
24
L. A. Zadeh, 'Fuzzy Sets as a Basis for a Theory of Possibility', Fuzzy Sets and Systems
1 pp.3-28 (1978)
41
2.2.4 The use of
For a fuzzy set A we can define the following
Strong
Weak
The is a significant concept in fuzzy set theory, the are chosen
and assigned arbitrarily by the decision maker. Such assignments are typ-
ically selected from the membership grades of the elements in set A. But,
the decision-maker can in fact, choose any real number from zero to one as
an In other words, the decision maker may decide that all elements
with membership grades less than or equal to any number between 0 and 1
are insignificant. In other words, some of the may not be in the set A.
42
2.2.5 Extension Principle
Extend mapping / : X > Y to relate fuzzy set A on X to fuzzy set B on Y:
(7)
The extension principle simple extends operations from a fuzzy set A to f(A)
as follows:
43
3. The Doctrine of Precedent
25
or ' st are decisis''
Historically, the Hong Kong law of contract has been dominated by the prin-
ciples of English common law and equity. Under s3 Application of English
Law Ordinance, the English common law and rules of equity apply in Hong
Kong unless amended by local legislation or inapplicable to local conditions.
Article 8 of the Basic Law provides that the laws previously in force in Hong
Kong (common law, rules of equity, ordinances, subordinate legislation and
customary law) shall be maintained unless they contravene the Basic Law
and subject to any amendments made by the legislature of the Special Ad-
minstrative Region.
Court of Final Appeal
I
Court of Appeal
I
Court of First Instance of High Court
I
District Court
I
Magistrates' Court
4
Tribunals
In Hong Kong, a decision of the Court of Final Appeal binds all courts lower
25
All the cases in the following section are quoted from the book titled "Nutcases" 2nd
ed. Sweet & Maxwell Ltd. (1999) written by Anne Ruff.
26l
stare decisis' is a Latin Phrase meaning 'let the decision stand.'
44
in the structure, while other lower courts such as Magistrates' Court binds
no other court. Most cases of authority, therefore, will originate from either
the Court of the Final Appeal or the Hong Kong Court of Appeal.
Under the common law legal system, the main development of contract law
has been through the process of precedent. Its principles are established
by case law. With the doctrine of precedent, judges found the pre-existing
principle and applied it to the new facts brought before him. And, in theory,
a judge cannot create new law but must apply old law to new facts. Whenever
a new problem of law for which there is no pre-existing customary or common
law principle comes before the courts to be decided upon, the judge makes
a ruling which must subsequently be followed by all other judges. In other
words, a decision made by a court is binding on other courts in later cases
where the facts are similar. As a consequence, the common law with those
precedents gradually became predictable and could be applied to new cases
with a degree of certainty.
Therefore, the precedents and cases form the basis by which the plaintiff
and the defendant can predict the result of their litigation. On the other
hand, these precedents enable the judges, plaintiffs and defendants to make
judgment in a more objective manner facing the subjective and highly unique
evidences in different cases. In fact, "judge-made" law is a major source of
law, by quantity.
45
3.1 Application in Law: A 'Via/id' Contract Redefined Via Fuzzy
Sets
A simple 'valid' contract can be broadly defined as an agreement between
two or more parties that is binding in law. This means that the agreement
generates rights and obligations that may be enforced in the courts. There are
many ways in which the essential structure of a contract can be analyzed.
One of the most common is to see a contract as consisting of three basic
elements: (1) offer and acceptance, (2) consideration and (3) intention to be
legally bound.
The three basic elements in the formation of a valid simple contract.
(1.) Offer and Acceptance
By offer and acceptance, it means the contracting parties must have reached
agreement with each other. An offer may be defined as a statement of willing-
ness to contract on specified terms made with the intention that, if accepted,
it shall become a binding contract. An offer may be made in writing, by
words or implied from conduct. It may be addressed to one particular per-
son, a group of persons, or the world at large, as in an offer of a reward.
On the other hand, acceptance may be defined as an unconditional assent,
communicated by the offeree to the offeror, to all terms of the offer, made
with the intention of accepting, whether an acceptance has in fact occureed
is ascertained from the behaviour of the contracting parties, including any
correspondence that has passed between them.
46
An offer is a statement of the terms by which the offeror is prepared to
be bound. The party making the offer is referred to as the offeror. The
party to whom it is made is called the offeree. If an offer is accepted then
the agreement exists. However, disputes may sometimes arise due to the
disagreement on whether a statement made by the offeror an offer at all.
Some statements are not offers, though they may appear so. Such statements
cannot be accepted so as to form valid contracts. The most common of
such statements are invitations to treat. An invitation to treat is made
at a preliminary stage and consists of one party, the invitor, extending an
invitation to another party, the invitee, to make an offer. This occurs, for
example at an auction, where auctionerr invites the audience to bid for the
goods on sale. His invitation is the invitation to treat only, but not an offer.
Each bid is an offer. An offer is accepted by the auctioneer by the fall of
his hammer: s6 Sale of Goods Ordinance (Cap 26). Where an auction is
advertised as being "without reserve", the auctioneer can withdraw any item
before the auction is held as held in the case, Harris v Nickerson [1873].
However, once the bidding begins, an auctioneer who refuses to sell to the
highest bidder will be liable to pay damages as shown by the precedent,
Warlow v Harrison. Moreover, a request for bids or tenders will not
be an offer unless it is coupled with the promise to accept the highest bid
as determined in a Hong Kong case, Lobley Co Ltd v Tsang Yuk Kie
[1997].
Moreover, where goods are displayed in a self service store on the shelves, or
in a shop window, the display is an invitation to treat, not an offer to sell.
When the customer picks up the commodity off the shelf in a self service store
47
and takes it to the cashier, it is indeed the customer who is making the offer
as established in the case, Pharmaceutical Society of Great Britain v
Boots Cash Chemists (Southern) Ltd [1953]. Besides, the position is
the same if the goods are in the window on display. This was determined in
the case, Fisher v Bell [1960], where the defendant was charged with the
offence of offering for sale a flick knife, Lord Parker C. J. stated that " the
display of an article with a price on it in a shop window is an invitation to
treat, but not an offer by the shop owner." The defendant who had displayed
such a knife in his shop, was acquitted. The main consequences of this are
that under the law of contract, shops are not bound to sell goods at the price
indicated and a customer cannot demand to buy a particular item on display.
On the other hand, an acceptance can be defined as an unconditional assent,
communciated by the offeree to the offeror, to all terms of the offer, made
with the intention of accepting. By unconditional, it means that the offeree
must accept the terms proposed by the offeror unconditionally or without
introducing any new terms which the offeror has not had the opportunity
to consider. The introduction of new terms is referred to as a "counter-
offer" and its effect in law is to bring the original offer to an end. This was
established in the case Hyde v Wrench [1840], in which the defendant
offered to sell a farm to the plaintiff for 1,000. In reply, the plaintiff offered
950. This was rejected by the defendant. Later, the plaintiff purported to
accept the original offer of 1,000. It was held by the court that there was no
contract; the counter-offer of 950 had impliedly rejected the original offer
which was no longer capable of acceptance.
Moreover, whether an acceptance has in fact occurred is ascertained from the
48
behaviour of the parties, including any correspondence that has passed be-
tween them. As a general rule, acceptance will not be effective unless commu-
nicated to the offeror by the offeree or by someone with his or her authority.
An uncommunicated mental assent will not suffice. In The Leonidas D,
C. A. [1985], Goff L. J. said that it is "axiomatic that acceptance of an offer
cannot be inferred from silence save in the most exceptional circumstances."
The communication of acceptance must be actually received by the offeror,
and where the means of communication are instantaneous (oral, telephone,
telex, fax), the contract will come into being when and where acceptance is
received.
It is worth noting that there are two exceptions to the rule that acceptance
must be communicated. The first one concerns unilateral contracts. In the
case of unilateral contract, one party promises to do something for another if
that other does a particular task. But there is no obligation to do that task.
This was seen in Carlill v Carbolic Smoke Ball Co, where the company
offered 100 to anyone who used the smoke ball and subsequently caught
influenza. There was no obligation on anyone to buy and use the smoke
ball. However, if a person did so, like Mrs Carlill, the contract was complete
on the use of the ball and the catching of the infection. At this point, the
unilateral offer is accepted and the contract is complete, the company is still
bound though it will not know of this at the time.
The other exception concerns acceptance made through the post. Where the
post is the appropriate means of communication between the parties, unless
the parties have agreed otherwise, the letter containing the offer is effective
when the offeree receives it. And a letter of revocation is effective when it
49
is received, because the revocation of an offer must be communicated to the
offeree before acceptance is made by the offeree. While a letter of acceptance
is effective as soon as it is validly posted, or put into the hands of a post-office
employee who may officially take letters for posting.
As illustrated in Byrne v Van Tienhoven [1880]. Here the defendants,
in Cardiff, posted an offer to the plaintiffs in New York on 1st October. On
8th October, however, the defendants had changed their minds, and they
posted a letter of revocation. Meanwhile, the plaintifs had received the offer,
had accepted by telegram on 11th October, and sent a letter confirming
acceptance on 20th October. The letter of revocation did not arrive until
25th October. The court held that a letter of acceptance was valid when
posted, while a letter of revocation was only valid when it was received.
Thus, the contract had been formed, probably on 11th October, but if not
by the telegram, certainly by the letter of 20th October because both were
sent before the revocation arrived.
In contract law, even if the letter of acceptance goes astray in the post and the
offeror is not told, he will still be bound in the contract. This was established
in Household Fire Insurance v Grant [1879], where Grant applied for
shares in the plantiff's company, and a letter of allotment was posted to
Grant but was never received. When the company went into liquidation,
Grant was asked to contribute the outstanding amount on his shares to the
company's assets. The court held that Grant was a shareholder, the contract
was made when the allotment letter was posted.
However, like many of the rules to be found in contract law, the parties can
50
avoid this rule if they wish. More precisely, the offerer can indicate in his
offer, that an acceptance will not be valid until he actually "receives notice
of it in writing" as in the case Holwell Securities v Hughes [1974]-
51
(2.) Consideration
Consideration is an essential element in the formation of contract. A consid-
eration may be defined as consisting a detriment to the promisee or a benefit
to the promisor: " ... some right, interest, profit or benefit accruing to the
one party, or some forbearance, detriment, loss or responsibility given, suf-
fered or undertaken by the other." The worlds "benefit" and "detriment" do
not refer to whether or not the bargain is an advantageous one. Indeed, it
means the contracting parties must have provided valuable consideration to
each other.
Consideration is called "executory" where there is an exchange of promises
to perform acts in the future, for instance, a bilateral contract for the supply
of goods whereby A promises to deliver goods to B at a future date and
B promises to pay on delivery. Alternatively consideration is referred to as
"executed" where one party performs an act in fulfilment of a promise made
by the other, for example, the unilateral contract where A offers a reward to
anyone who provides certain information.
However, past consideration, unlike executory or executed consideration, is
not a valid consideration. Consideration is said to be past when it consists
of some service or benefit previously rendered to the promisor. Whether a
consideration is past is a matter of fact. In Re McArdle, C. A. [1951], a
woman carried out work to a house jointly owned by members of her family.
After the work had been completed, her relatives signed a document promis-
ing to pay her for the work. It was held that she could not recover the sum
promised as her consideration was past. Here the promise to pay is made
52
after the act has been completed. If however, the service is performed at
the defendant's request and in circumstances where both parties understand
that payment will follow, the court may consider to enforce the transaction.
It is worth noting that, consideration must be valuable but need not be ade-
quate. This means that provided something of value is given, in the absence
of fraud or improper pressure, then it will be enough for a contract to be
valid. As long as the consideration has some value, the courts will not inves-
tigate its adequacy. A contract is a bargain freely and voluntarily entered
into and the courts are not concerned with its fairness. Where considera-
tion is recognized by the law as having some value, it is described as "real"
or "sufficient" consideration. In order to be sufficient, a consideration must
have some value, however trivial. However, if the consideration is empty or
illusory, or concerned with human feelings, the courts have tended to regard
it as insufficient. As established in Chappell & Co v Nestle Co Ltd
[I960], where the defendant - chocolate manufacturers sold a record called
"Rockin' Shoes" to the public in return for money and three chocolate bar
wrappers. The plaintiffs owned the copyright of the record. They were enti-
tled to a royalty calculated by reference to the "ordinary retail selling price",
which the defendants claimed was the money payment alone, and did not
include the wrappers which were later thrown away by the record company.
It was held that the chocolate wrappers also formed part of the considera-
tion. They had some economic value because they induced people to buy
chocolate which they might otherwise not have purchased.
Consideration, however, cannot exist in doing what you are already bound
to do in a contract with the same other party although if you do more you
53
could expect extra payment. In Stilk v Myrick [1809] where Stilk, a
seaman, signed up for a voyage from London to the Baltic and back. During
the voyage two seamen deserted. The master of the ship agreed to divide
their pay between the remaining members of the crew if they would work
the ship back to London without the two deserters being replaced. On their
return the master refused to pay Stilk and the other seamen. It was held by
the court that Stilk and other seamen had not provided any consideration
for the master's promise. They merely agreed to do what they were already
bound to do.
On the other hand, in Hartley v Ponsonby [1857], the plaintiff, an able
seaman, signed up with the master a ship for a voyage from London to Aus-
tralia and back. There was a crew of 36, but 17 of them deserted on arrival
in Australia. The master agreed to pay the plaintiff 40 if he helped to sail
the ship to Bombay with the remaining crew. It was held, however, that the
plaintiff's original contract was terminated because it was dangerous to said
the ship with a crew of 19 seamen. Therefore, the plaintiff had entered into
a new contract and had to provide good consideration for hte mater's promise.
54
(3.) Intention to be legally bound
Further to offer, acceptance and consideration, for a contract to be valid, the
parties must intend to make the sort of bargain which is legally binding -
Intention to be legally bound. The law expects a business person to intend
his business arrangements. Business people who do not wish to enter into
a binding contract must record in writing a specific rebuttal of the legal
contract - for example, by using clear words such as 'this agreement merely
records the parties' wishes and is not binding in law', or 'this is not intended
to create a legal contract and has no legal effect on the parties.'
In order to assist the courts in deciding whether or not an intention to be
legally bound exists, two presumptions are made in the law of contract.
First, in social and domestic agreements there is no intention to be legally
bound. As illustrated in Balfour v Balfour [1919], where the defendant
was a civil servant stationed in what is now Sri Lanka. He and his wife came
to England on leave. When it was time to return, he left his wife in England
for the good of her health. They agreed that he would pay her 30 per
month while they were apart. Later the wife divorced him and he stopped
paying. She sued him, unsuccessfully. However, in another case Merritt v
Merritt [1970], where an agreement entered into by a husband and wife,
after they had separated, was held to be binding. It is worth noting that it
is just a presumption but not a rule.
In Wu Chiu-kuen v Chu Shui-ching [1992], the plaintiff, Mr Wu was
employed as an attendant at a mahjong "school". The defendant, a patron,
55
Mr Chu, gave some money to the plaintiff who bought five Mark Six tickets
with the money and gave them to the defendant. One of the tickets won a
prize. The plaintiff alleged that there was an agreement to share the win-
nings. There was a lack of evidence as to the terms of any agreement such as
how many tickets to buy, how to buy and how to share. The plaintiff gave
evidence that he counted the bills given to him only when he arrived at the
Jockey Club where he decided to contribute an equal amount of money and
chose how to buy the tickets. The court found in favour of the plaintiff, and
held that arrangements of this sort are very often informal and even loose
at times. What is important is that the persons involved have acted on the
informal arrangements and conducted themselves in such a way that it is
clear from all the circumstances that they have agreed and intended to buy
the tickets together and share the winnings, if any, together. In my view,
unless the parties' arrangements coupled with their conduct pursuant to such
arrangements are so uncertain that a reasonable man cannot conclude that
they have agreed and intended to buy and share the tickets together, I think
the court should give effect to such an agreement.
Second, in commercial agreements the presumption is that the parties have
the intention to be legally bound. As in Edwards v Skyways [1964],
where the defendant, an airline agreed with British Airline Pilots Association
to pay "ex gratia" payments "approximating to" an easily calculated sum to
pilots made redundant, the plaintiff, a pilot, sued for such a payment under
the agreement. The defendant claimed that there was no intention to create
legal relations and that the promise was too vague. The court held that it was
a commercial agreement. Therefore, the presumption was that there was an
56
intention to create legal relations. The onus was on the defendant to rebut
the presumption which they had not done. The use of words "ex gratia"
merely meant that the defendant did not admit any pre-existing liability,
rather than there was no legally binding agreement.
After explaining the meaning of the three basic elements in a valid contract,
the next step is to show how such a contract can be redefined via fuzzy sets
by utilizing these basic elements.
Let's denote OA*, C* and I* be the three fuzzy sets representing the offer
and acceptance, consideration and intention to be legally bound respectively.
For simplicity, I will assume the legal intention be measured by the number of
correspondence between the contracting parties alone. The possibility that
the contracting parties will indicate their intention, for example, by making
reliance expenditure though common is not considered here.
57
Fuzzy Sets Description
1. Offer and acceptance
2. Consideration (C*)
3. Intention to be legally
bound (I*)
*) is a fuzzy set whose membership
grades represent the degree of per-
ceived clarity of the offer and accep-
tance compared to the legal stan-
dard. Let XjGZ (Z is the universal
set of contracts) where i refers to a
particular contract.
is a fuzzy set whose membership
grades represent the perceived suf-
ficiency of the consideration com-
pared to the legal standard. Let
X(EZ, where i refers to a particu-
lar contract.
is a fuzzy set whose membership
grades represent the degree of per-
ceived intention to be legally bound
compared to the legal standard. For
simplicity, I will assume the legal in-
tention be measured by the number
of correspondence between the con-
tracting parties alone.
58
Now suppose we have six contracts, their corresponding membership grades
of the three fuzzy sets A*, B* and C* are assumed as follows:
Via OA*, the offer and acceptance of all the contracts, with the exception of
Contract No.5 which is considered to be containing no offer and acceptance,
are similar to the legal standard.
Via C*, the consideration of Contract No.2 and Contract No. 4 are considered
to be largely insufficient compared with the legal standard, while Contract
No.3 specified a value of consideration that is completely consistent with the
legal standard.
Via I*, I assumed that for parties who have been communicating with each
other for more than 2 times, demonstrate an intention to be legally bound
that is perfectly consistent with the legal standard.
The set f2* consists of the sets OA*, C* and I*. Semantically, a valid contract
is composed of an offer and acceptance, consideration and an intention to be
legally bound.
Moreover, we can obtain the membership grades of the fuzzy set
59
'valid' Contract by the extension principle introduced in Section 2.25 above.
The solution is obtained by joining the membership grades of the offer and
acceptance with that of the consideration and the intention to be legally
bound. We then obtain the maximum membership grade among all the
membership grades to obtain each contract's membership grade in We
proceed by utilizing the membership grades of OA*, C* and I*.
Each of the individual triplets represents the mapping of a contract in OA*
onto an element contained in both C* and I*. The first element of each triplet
represents the membership grade of a particular contract in OA*. The second
element is the membership grade of the contract in C* and the third element
represents the membership grade of the contract in I*.
The minimum membership grade of each triplet is selected via the intersec-
tion of the membership grades in the triplet. If any of the membership grades
contained in the triplet is zero, the membership grade of their intersection
will also be zero. In other words, a contract must exist in each of the OA*,
C* and I*, for it to be in the new fuzzy set
Each element in OA* has six minimal membership grades. By applying the
max-min principle, the highest membership grade is then selected as the
membership grades of each contract in the new fuzzy set
60
Contract No.l' s membership grade is
Contract No.2's membership grade is
Contract No.3's membership grade is
Contract No.4's membership grade is
61
Contract No.5's membership grade is
Therefore, = 0.6 / Contract No.l , 0.2 / Contract No.2 , 0.6 / Contract
No.3 , 0.1 / Contract No.4 , 0.0 / Contract No.5.
Deleting Contract No.5 from since its membership grades is zero, the
becomes
= 0.6/Contract No.l , 0.2/'Contract No.2,
0.6/Contract No.3 , 0.1/Contract No.4 (11)
The fuzzy set is said to be described by
(12)
The membership grades indicate the degree of inclusion and the level of
conjectural uncertainty attributable to each contract. Thus the judge can
expect Contract No.l and No.3 exhibit a relatively strong compliance with
the legal standard. While he can expect Contract No.2 and No.4 display a
weak compliance with the legal standard.
62
In addition, other fuzzy variables can be added to the above example, for
instance, the 'legal' capacity, LC* of the contracting parties, where LC* can
be a fuzzy number indicating, for example, the age of the parties.
Each type of contract can be defined uniquely in a manner similar to the
above. Most importantly, the possibility distribution generated by the set
can be used to describe the degree of membership of a particular contract's
inclusion in the set. The judge can evaluate the possibility of a particular
contract being a valid one by projecting the contract into the set
The judge might evaluate the fuzziness (the subjective uncertainty) in the
set through a derived measure of fuzziness. For instance, let be
a measure of the degree of fuzziness or uncertainty which the judge ascribes
on the basis of the evidence.
The should satisfy the following axioms:
1 . ) = is a crisp set with zero uncertainty.
2 . ) h a s a unique maximum if
3 . ) > is crisper than and vice verse.
4.) = i.f.f. they are equally fuzzy or uncertain.
The assignment of a membership grade is 1/2 to a contract indicates that
the judge is uncertain of the contract's inclusion in the fuzzy set of valid
contract. If the membership grade is less than 1/2, the judge is inclined to
consider the contract not in the fuzzy set of valid contract. On the other
63
hand, if the membership grade is larger than 1/2, the judge is more inclined
to consider it in the fuzzy set of valid contract.
The membership grade of 1/2 demonstrates that the judge is equally uncer-
tain whether to consider the particular contract as valid or invalid. Thus,
the measure of fuzziness or uncertainty is the highest when
De Luca et al (1972) has proposed a fuzziness measure as follows:
(13)
where K is a positive constant and n is the number of contracts in
This measure can be used to demonstrate how contracting parties can project
the expected duration of the judicial process when disputes occur in the pre-
vious example. Recall that,
fi* = 0.6/Contract No.l , 0.2/Contract No.2,
0.6/Contract No.3 , 0.1/Contract NoA
where the membership grades indicate the degree of compliance. Normalize
the constant term K in the F(fi*) to 1 and substituting the above membership
grades in the equation (13).
64
The value 2.1715 represents a measure of the fuzziness or uncertainty con-
tained in the fuzzy set of contracts
The contracting parties (plaintiff and defendant) and the judges can utilize
this value to compare with another fuzzy set to project, for example, the
duration of the judicial process for settling disputes. If F is greater than
2.1715, the level of fuzziness in is higher than the fuzziness contained in
Resolving disputes among contracts in the requires a longer duration
and greater energy than that for contracts in
Moreover, the judges may decide that all contracts with membership grades
less than or equal to 0.6, for example, are insignificant or invalid, that can
be done by setting the a-cut = 0.6. This level of may vary with
different classes of contracts, for instance, the level of may be higher
for contracts with a larger monetary value.
65
4. Default Rules
27
Broadly spekaing, the legal rules of contracts can be divided into two dis-
tinct categories. The larger classes consists of "default" rules that parties
can contract around by prior agreement, while the smaller, but important
class consists of "immutable" rules that parties cannot change by contractual
agreement. Default rules can be used to fill the gaps in incomplete contracts;
they will govern unless the parties contract around them. Immutable rules
cannot be contracted around; they will govern even if the parties attempt to
contract around them.
For example, under Uniform Commerical Code (U.C.C.), the duty to act
in good faith is an immutable part of any contract, while the warranty of
merchantability is simply a default rule that parties can waive by agreement.
Similarly, most corporate statuates require that stockholders elect directors
annually but allow the articles of incoporation to contract around the default
rule of straight voting.
Statutory language such as "unless otherwise provided in the certificate of
incorporation" or "unless otherwise unambiguously indicated" makes it easy
to identify statutory default, but common-law precedents can also be divided
into the default and immutable categories.
For instance, the common-law holding of Peevyhouse v Garland Coal & Min-
ing Co., which limited damages to diminution in value, could be contractually
reversed by prospective parties. In contrast, the common law prerequisities
"Reference: 'Filling Gaps in Incomplete Contracts: An Economic Theory of Default
Rules.'
66
of consideration is largely an immuable rule that parties cannot contractually
abrogate.
Default rules have alternatively been termed background, backstop, enabling,
fallback, gap-filling, off-the-rack, opt-in, opt-out, preformulated, preset, pre-
sumptive, standby, standard-form and suppletory rules. Professor Richard
Posner has once argued that default rules should "economize on transaction
costs by supplying standard contract terms that the parties would otherwise
have to adopt by express agreement." It implies that default rules can help
in clarifying ambiguous statements and terms or filling in missing terms in
a contract. In other words, default rules can turn some unclear statements
or missing ideas in a contract to something that are commonly agreed and
known.
Moreover, default rules can reduce the cost of contract formation by sup-
plying standard and pre-determined contract terms for incomplete contracts.
Contracts may be incomplete because the transaction cost of explicitly con-
tracting for every contingency is prohibitively high. Lawmakers can then
facilitate exchange by providing appropriate default rules
28
through which
the incompleteness can be reduced, so as the possible fuzziness in the con-
tract.
28
For details on how to draft optimal default rules, please refer to 'Filling Gaps in In-
complete Contracts: An Economic Theory of Default Rules' by Ian Ayres, Robert Gertner.
67
Conclusion
The major conclusion to be drawn from this paper is that fuzzy set theory
and probability theory shuld be viewed not as rivals, and not necessarily even
as complementary, but rather as similar logical systems, having a common
core that is adequate for many aspects of decision analysis, and differing in
certain well-defined features that may, or may not, be relevant in particular
applications. Having illustrated how the fuzzy logic can be applied to re-
define a valid contract, and taken into account the imprecision and fuzziness
in some legal concepts, the judicial process can then be modelled in a more
realistic manner.
68
References
1. K. J. Arrow, F. H. Hahn. 'General Competitive Analysis', North-
Holland. (1971)
2. Ayres Ian Ayres, Robert Gertner. 'Filling Gaps in Incomplete Con-
tracts: An Economic Theory of Default Rules'.
3. Hans Bandemer, Siegfried Gottwald. 'Fuzzy Sets, Fuzzy Logic, Fuzzy
Methods with Applications', John Wiley Sons, Inc. (1995)
4. John H. Barton. 'The Economic Basis of Damages for Breach of Con-
tracts '.
5. Peter L. Bernstein. 'Against The Gods: The Remarkable Story of Risk',
John Wiley Sons, Inc. (1998)
6. Mark Blaug. 'Economic theory in retrospect', 5th ed., Cambridge Uni-
versity Press, (1997)
7. Anne Caver. "Hong Kong Business Law" 4th ed. Longman Asia Ltd.
(2000)
8. Joe T. L Chan. 'Lecture Notes on History of Economic Thought', Un-
dergraduate Course, University of Hong Kong, (2001-2002 k 2002-2003
2nd Semester)
9. Joe T. L Chan. 'Lecture Notes on Economics of Property Rights', Un-
dergraduate Course, University of Hong Kong, (2002-2003 2nd Semester)
69
10. John Maynard Keynes. 'Collected Writings of John Maynard Keynes.
Vol. 7, The General Theory of Employment, Interest and Money',
London: Macmillan, (1973a)
11. John Maynard Keynes. 'Collected Writings of John Maynard Keynes.
Vol. 8, A Treatise on Probability', London: macmillan, (1973b)
12. John Maynard Keynes. 'Collected Writings of John Maynard Keynes.
Vol. 9, Essays in Persuasion', London: Macmillan.
13. John Maynard Keynes. 'Collected Writings of John Maynard Keynes.
Vol. 10, Essays in Biography', London: Macmillan, (1972).
14. John Maynard Keynes. 'Collected Writings of John Maynard Keynes.
Vol. 13, The Genaral Theory and After: Preparation', London: Macmil-
lan.
15. John Maynard Keynes. 'Collected Writings of John Maynard Keynes.
Vol. 14, The General Theory and After: Defence and Development',
London: Macmillan.
16. John Maynard Keynes. 'Collected Writings of John Maynard Keynes.
Vol. 29, The General Theory and After: A Supplement', London:
Macmillan.
17. John Maynad Keynes. 'The General Theory of Employment. Quarterly
Journal of Economics, Vol. 51, (1937), p209-223.
18. Frank H. Knight. 'Risk, Uncertainty and Profit', Reprinted by Beard-
Books. (2002)
70
19. Robert E. Lucas, Jr., Jr and Sargent, T.J., eds., 'Rational Expectations
and Econometric Practice', London, Allen and Unwin.
20. Yusuf M. Mansur. 'Fuzzy Sets and Economies', E. Elgar, (1995).
21. Patrick Minford. 'Rational expectations macroeconomics : an introduc-
tory handbook', 2nd ed., Oxford, UK : Blackwell, (1992)
22. Edmund S. Phelps. 'Seven schools of macroeconomic thought : the
Arne Ryde memorial lectures', Oxford [England] : Clarendon Press,
(1990)
23. Anne Ruff. "Nutcases" 2nd ed. Sweet & Maxwell Ltd. (1999)
24. Christian Schmidt. 'Uncertainty in economic thought', Cheltenham,
U.K. : E. Elgar, (cl996)
25. Steven M. Sheffrin. 'Rational expectations', 2nd ed., Cambridge Uni-
versity Press, (1996)
26. Kazuo Tanaka. 'An Introduction to Fuzzy Logic for Practical Applica-
tions', Springer, (1991).
27. Teodoro Dario Togati. 'Keynes and the neoclassical synthesis : Ein-
steinian versus Newtonian macroeconomics', London ; New York :
Routledge, (1998)
28. John Von Neumann, Oskar Morgenstern. 'Theory of Games and Eco-
nomic Behaviour', Princeton University Press. (1944)
71
29. R. R. Yager, S. Ovchinnikov, R. M. Tong, H. T. Nguyen. 'Fuzzy Sets
and Applications: Selected Papers by L. A. Zadeh', John Wiley Sons,
Inc. (1987)
30. Lotfi A. Zadeh, Janusz Kacprzyk. 'Fuzzy Logic For The Management
of Uncertainty', John Wiley Sons, Inc. (1992)
31. H. J. Zimmermann, L. A. Zadeh, B. R. Gaines., 'Fuzzy Sets and De-
cision Analysis', V. 20, TIMS studies in the management sciences,
Elsevier Science Publishing Company, Inc. (1984)
32. Constantin Zopounidis, Panos M. Pardalos, George Baourakis. 'Fuzzy
Sets in Management, Economics and Marketing', World Scientific Pub-
lishing Co. Pte. Ltd. (2001)
72