Knightian Uncertainty Theory

Knightian Uncertainty Theory, developed by economist Frank Knight, distinguishes between measurable risk and unknown uncertainty. Risk involves situations where probabilities can be calculated, like rolling dice. In contrast, Knightian uncertainty refers to scenarios where the outcomes are unpredictable and probabilities cannot be assigned, such as economic crises or new technologies. This type of uncertainty complicates decision-making because it lacks quantifiable data, making it challenging for individuals and businesses to navigate effectively. Understanding this distinction is crucial in fields like economics, finance, and strategic planning, where recognizing the limits of predictions can significantly impact decisions.