Arrow's Impossibility Theorem

AAA

DEFINITION of 'Arrow's Impossibility Theorem'

A social-choice paradox illustrating the impossibility of having an ideal voting structure that is reflective of specific fairness criteria, such as Pareto efficiency. Arrow's impossibility theorem states that a clear order of preferences cannot be determined while adhering to mandatory principles of fair voting procedures.

INVESTOPEDIA EXPLAINS 'Arrow's Impossibility Theorem'

For example, the following shows the type of problem typical of an election. Consider the following example, where voters are asked to rank their preference of candidates A, B and C:

• 45 votes A > B > C (45 people prefer A over B and prefer B over C)
• 40 votes B > C > A (40 people prefer B over C and prefer C over A)
• 30 votes C > A > B (30 people prefer C over A and prefer A over B)

Candidate A has the most votes, so he/she would be the winner. However, if B was not running, C would be the winner, as more people prefer C over A. (A would have 45 votes and C would have 70). This result is a demonstration of Arrow's theorem.

RELATED TERMS
  1. Kenneth Arrow

    An American neoclassical economist who won the Nobel Memorial ...
  2. Liar's Poker

    A game often associated with Wall Street traders who use statistical ...
  3. Game Theory

    A model of optimality taking into consideration not only benefits ...
  4. Nash Equilibrium

    A concept of game theory where the optimal outcome of a game ...
  5. Voting Shares

    Shares that give the stockholder the right to vote on matters ...
  6. Cumulative Voting

    The procedure of voting for a company's directors; each shareholder ...
RELATED FAQS
  1. What is the investor rights movement?

    The investor rights movement, also called shareholder activism, refers to the efforts of shareholders of publicly traded ...
Related Articles
  1. Investing Basics

    The Merger - What To Do When Companies Converge

    Learn how to invest in companies before, during and after they join together.
  2. Options & Futures

    The Two Sides Of Dual-Class Shares

    Find out how dual-class shares can affect a company's performance.
  3. Mutual Funds & ETFs

    Proxy Voting Gives Fund Shareholders A Say

    You have the right to take part in important company decisions - even if you cannot attend the meetings.
  4. Investing Basics

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  5. Economics

    Global Rivals Locking Horns In Ukrainian War

    Huge power games which are being played behind the Ukrainian conflict are rooted in a previous revolution, a past Cold War, and an old Russia-West rivalry.
  6. Economics

    Does A Junk Rating Reflect Russia's Fundamentals?

    Moody’s, like other credit rating agencies, has downgraded Russia’s sovereign debt rating to non-investment grade, but does this reflect Russia's economy?
  7. Investing

    What Has Been Groupon’s Growth Strategy?

    Groupon established a strategy with efforts to become a broader force in the e-commerce world and to expand more strongly into international markets.
  8. Economics

    The Impact Of Ending The US Embargo On Cuba

    Many argue that ending the US embargo on Cuba will not only make US consumers happy, but also help the US economy and bring more freedoms to Cuba.
  9. Economics

    This Is A Small Country With Huge Potential to Grow

    Trinidad and Tobago's increased revenue and economic success have been primarily generated by its energy sector, but it still might be best to diversify.
  10. Economics

    Popular Places Where U.S. Citizens Need A Visa

    A U.S. passport will get you into many countries, but not everywhere. Here's how to visit five of the most popular destinations that require visas.

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center