Sun Dec 16th, 2012 at 03:17:30 PM EST
While perusing an INET article on risk, "Choice Under Uncertainty": A Misnomer by Raphaële Chappe, (someone to keep an eye on), I saw another reference to Frank Knight, one of the founders of the Chicago School of economics and his 1921 work on risk. I knew of Knightian uncertainty but decided to find out more about Knight. Wiki to the rescue:
Knight is best known as the author of the book Risk Uncertainty and Profit, (PDF) based on his Ph.D. dissertation at Cornell University. In that book, he carefully distinguished between economic risk and uncertainty. Situations with risk were those where the outcomes were unknown but governed by probability distributions known at the outset. He argued that these situations, where decision making rules such as maximising expected utility can be applied, differ in a deep way from "uncertain" ones, where the outcomes were likewise random, but governed by an unknown probability model. Knight argued that uncertainty gave rise to economic profits that perfect competition could not eliminate.
While most economists now acknowledge Knight's distinction between risk and uncertainty, the distinction has not resulted in much theoretical modelling or empirical work. (emphasis added)
Well, fancy that! Who could'a imagined? Perhaps one of the perks of being the guy who first described a field is the opportunity to systematically ignore the implications when those implications were awkward. I can hear his ghost responding to an accusation that his life's work paved the road to the biggest financial calamity since the Great Depression whilst ignoring Knightian uncertainty: "Don't harangue me about risk! I wrote the book."
This seems to be the focus of Raphaële Chappe's academic work and one her background well equips her to investigate with authority.