Risk, Uncertainty and Profit

Knight is best known for Knightian uncertainty. Frequently described as a context for decision-making in which not even the probability distributions of the outcomes of future actions are known, uncertainty is also sometimes distinguished from risk by its uninsurability (Knight 1999b: 345).

entrepreneurial action, and hence the reason for the existence of economic profit, also makes it an interpersonal, even moral, problem. The “true uncertainty,” he says, is our uncertainty about the capacity of others to “meet uncertainty” (Knight 1921: 309). The entrepreneur accepts that challenge, making judgements about the capabilities of those hired, even though they may cost the entrepreneur dearly.

Because Knight identified economic decision-making in the context of uncertainty as the fundamental departure of actual economic life from perfect competition theory, Knightian uncertainty is generally considered a foundational contribution to the theory of entrepreneurship and is indirectly linked to the development of non-neoclassical theo­ries of the firm. Douglass North has made the concept integral to his historical work on the process of economic change (North 2005), and it has come to be used in financial eco­nomics as a counter to the use of Bayesian subjective probabilities in market forecasting.