Presbyter takes Knight

Abstract

Purpose

The purpose of this editorial is to explore the usefulness of distinguishing between “risk” and “Knightian uncertainty.”

Design/methodology/approach

The paper presents a representative, insurance‐based model of Knightian uncertainty arising out of potential major structural changes (without historical precedent) in liability claim settlements. It then considers whether or not formal statistical forecasting and decision making are possible in this context.

Findings

For real‐world settings, it is found that a Bayesian statistical framework is sufficiently comprehensive to permit forecasting and decision making in the presence of Knightian uncertainty. The paper then shows that the Bayesian approach fails only if the sample space underlying the potential structural change is truly nonmeasurable.

Originality/value

It is argued that, under a Bayesian worldview, the distinction between risk and uncertainty is necessary only in highly abstract epistemological modeling.

Citation

Powers, M.R. (2010), "Presbyter takes Knight", Journal of Risk Finance, Vol. 11 No. 1, pp. 5-8. https://doi.org/10.1108/15265941011012651