Monday, May 31, 2010

Risk versus Uncertainty

Prof Frank H Knight (1921) proposed that "risk" is randomness with knowable probabilities, and "uncertainty" is randomness with unknowable probabilities. However, risk and uncertainty both share features with randomness. The illustration below explains the relationship of the concepts better than words...


Source: Knight, F H (2002/1921), Risk, Uncertainty and Profit, Washington, DC: BeardBooks.

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