Radical Uncertainty

US economist Frank Knight is credited with distinguishing uncertainty from risk back in 1921. Yet the two are often conflated.

Kay (an eminent economist) and King (a former Governor of the Bank of England) argue powerfully that the distinction does matter. They range widely across macroeconomics, politics, and consumer choices to show why reducing the future to a set of numbers (probabilities) creates a false – and often disastrous – illusion of power over future outcomes.

They argue that instead we should aim to make decisions that stand a reasonable chance of being robust against unknowable, as well as forecastable,… show more.

These are volatile and tumultuous times, which makes it difficult if not impossible to make decisions with any assurance of accuracy. Kay and King, in this very substantial and learned book, have written what we think is one of the best guides to making these decisions with the best tools and insights we have. The authors have the advantage of being very seasoned practitioners in several domains as well as extremely well-read in the subjects that impact decision-making under these conditions. Their emphasis is on the limits of current mathematical tools, and they advise that we use the more pragmatic… show more.

It’s time for some economics. I am embarrassed to say that following the Global Financial Crisis my profession has fallen into acute disarray, its models have proved to be utterly inadequate. Radical Uncertainty in the landmark book explains why this was the case. Economists had reduced all unknowns to quantifiable probabilities, which could then be inserted into models and managed by diversification and insurance. Unfortunately, the world is not like that: with disturbing frequency, people, businesses, and societies are hit by ‘unknown unknowns’ like COVID. Managing uncertainty requires an approach quite alien to economics, its priorities being the resilience of… show more.