The Knightian Risk

Knightian risk, named after economist Frank Knight, refers to situations involving uncertainty where the outcomes and their probabilities are unknown or unknowable. Unlike measurable risks, such as rolling dice, where probabilities are known, Knightian risk involves ambiguity, making it impossible to accurately assess the likelihood of future events. This concept is important in economics and finance because it highlights the limitations of prediction and the challenges in decision-making when true uncertainty exists, forcing individuals and organizations to rely on judgment, assumptions, or derivatives of risk to navigate unpredictable environments.