What is 'Arrow's Impossibility Theorem'
Arrow's impossibility theorem is a socialchoice 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.
BREAKING DOWN '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.
Who Developed the Theorem?
Kenneth J. Arrow (19212017) was an American economist who had a long teaching career at Harvard University and Stanford University. Arrow's impossibility theorem, published in 1950, earned him a Nobel Prize in Economics in 1972.

Bayes' Theorem
Bayes' theorem is a mathematical formula for determining conditional ... 
Mutual Fund Theorem
The mutual fund theorem is an investing theory suggesting the ... 
C Corporation
A legal structure that businesses can choose to organize themselves ... 
Posterior Probability
Posterior probability is the revised probability of an event ... 
Cumulative Voting
The procedure of voting for a company's directors; each shareholder ... 
Contingent Voting Power
A provision granting voting rights to preferred shareholders ...

Investing
Understanding the ModiglianiMiller Theorem
The ModiglianiMiller (M&M) theorem is used in financial and economic studies to analyze the value of a firm, such as a business or a corporation. 
Small Business
How Zuckerberg Will Control Facebook Forever (FB, GOOG)
Zuckerberg has pledged his wealth for charity, which includes his Facebook stock ownership. Here's how he will still control the Facebook business forever. 
Personal Finance
Quiz: How Do Your Finances Measure Up?
We look at average American debt, credit scores and much more so you can find out how you stack up. 
Investing
A Primer On Preferred Stocks
Offering both income and relative security, these uncommon shares may work for you. 
Investing
Explaining the Coase Theorem
The Coase theorem states when there are competitive markets and no transaction costs, bargaining will lead to a mutually beneficial outcome. 
Investing
Efficient Market Hypothesis
An investment theory that states it is impossible to "beat the market". 
Managing Wealth
What You Need To Know About Preferred Stock
Curious about preferred shares? Here's what you should know about these bondlike instruments. 
Trading
Trading Wave "C" In Stocks
Stock corrections typically unfold in three major waves: A, B and C. It is highly likely B, is underway, and any slide in prices over the coming weeks is likely to trigger wave C in many stocks. 
Trading
J. C. Penney Reports as a Retail Mall Survivor
J. C. Penney reports earnings with an elevated P/E ratio of 52.63, but the stock is recovering as a successful "option on survival." 
Investing
What are Class B Shares?
Class B shares are one classification of common stock issued by corporations.

What is Fisher's separation theorem?
Fisher's separation theorem stipulates that the goal of any firm is to increase its value to the fullest extent, regardless ... Read Answer >>