# More on Risk vs Uncertainty

I previously discussed risk and uncertainty here and I will continue the discussion in this article.

Basically, I found this article which summed it up nicely. Economic risk refers to a probabilistic event which is quantifiable and may be taken into account in transaction calculations by utilizing an expected value framework. Gambling would be a great example. There are various chances for various different events to occur each of which leads to a certain cost or benefit. An expected value can be calculated and a probability distribution can be constructed.

Economic uncertainty, also referred to as Knightian Uncertainty, is the measure of risk which has not involved in the calculation. A degree of this is inescapable. The problem with an uncertain event is not that it couldn’t be quantified, but that it hasn’t been. This almost always refers to unanticipated events. An example would be the probability of being hit by a meteor tomorrow morning. It’s so exceedingly rare that you didn’t stop to think about it or anticipate it, although you could probably work it into your calculation if you had thought about it.

I would argue that Knightian Uncertainty is precisely neutral. This is because the unanticipated events may or may not happen, could be harmful or beneficial, and the effects in any case are of an unknown magnitude. Therefore, the rational expectation is that they will sometimes happen, are neutral, and are of a moderate magnitude.

•
•
•
•