Risk versus Uncertainty: Frank Knight’s “Brute” Facts of Economic Life
By William Janeway
Published on: Jun 07, 2006
Dr. William H. Janeway, Vice Chairman, Warburg Pincus, received his doctorate in economics from Cambridge University where he was a Marshall Scholar. He was Valedictorian of the Class of 1965 at Princeton University. Prior to joining Warburg Pincus in 1988, where he was responsible for building the Information Technology practice, he was Executive Vice President and Director at Eberstadt Fleming. Dr. Janeway is a director of BEA Systems, Manugistics, Scansoft and UGS. He is also a member of the board of directors of the Social Science Research Council and a member of the board of Trustees of Cambridge in America, University of Cambridge. He is a Founder Member of the Board of Managers of the Cambridge Endowment for Research in Finance (CERF).
“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”—Donald Rumsfeld
“Ah, what a dusty answer gets the soul, When hot for certainties in this our life”—George Meredith
Donald Rumsfeld’s characteristically idiosyncratic gloss on George Meredith’s existential meditation attracted derision across many constituencies. But Rumsfeld summarized a way of structuring our understanding of the world that has profound and immediate relevance. Most particularly, over the past generation, the application of increasingly powerful and sophisticated computerized statistical analysis has interacted with the work of theoreticians of finance to transform the capital markets in the U.S. and around the world. Our mastery of “known unknowns”—i.e., well-defined probabilities—has increased enormously, transformationally. The measurement and management of “risk” has become a major concern of all financial institutions and their regulators, especially since the collapse of Long Term Capital Management (LTCM) in 1998. At the same time, proposals to privatize Social Security and, more generally, to rely on “risk-managed” financial markets for economic security find their theoretical rationalization in the teachings of “modern” finance. And yet, as Rumsfeld and Meredith assert in their very different ways, there is another category of the world’s possible outcomes that lies beyond the reach of modern, market-based, risk management techniques.
More than eighty years ago, Frank Knight set out to parse the difference between risk and uncertainty and the significance of that difference. In Risk, Uncertainty and Profit, Knight distinguished between three different types of probability, which he termed: “a priori probability”; “statistical probability” and “estimates”. The first type “is on the same logical plane as the propositions of mathematics”; the canonical example is the odds of rolling any number on a die. “Statistical probability” depends upon the “empirical evaluation of the frequency of association between predicates” and on “the empirical classification of instances”. When “there is no valid basis of any kind for classifying instances”, only “estimates” can be made.1 In contemporary Bayesian parlance, in the first case, the probability distribution of the prior and all its moments are known definitionally; in the second case they are specified by statistical analysis of well-defined empirical data; in the third case such data as exists do not lend themselves to statistical analysis. Continue reading →
冯亦代说：“李大姐，我能好到哪里去呢？” Continue reading →
Davis Polk & Wardwell‘s recent memorandum, entitled “Treasury’s Rules of the Road for Regulatory Reform,” describes Treasury’s framework for regulatory reform, focusing on the comparatively more detailed proposals for addressing systemic risk, and sets forth some of the issues the government and the private sector may consider as the details are hammered out.
NY Books, Volume 56, Number 5 · March 26, 2009
The Enlarged Republic—Then and Now
By Cass R. Sunstein
To many modern readers, the Federalist Papers seem formal, musty, old, and a bit tired—a little like a national holiday that celebrates events long past but lacks any sense of struggle and excitement, or even a clear message. But under stringent time pressure, starting in October 1787, Alexander Hamilton, James Madison, and John Jay, writing under the name of “Publius,” produced the best historical record, by far, of the uniquely American contribution to political thought and practice.
It is important to see that their arguments were a product of a concrete historical drama, involving the fate of an emerging nation that was having an exceedingly difficult time governing itself. But Publius’s claims bear not only on American debates of the eighteenth century, but also on those of the nineteenth, twentieth, and twenty-first. They offer lessons for making war and making peace, and for domestic crises of many different kinds. Indeed, they provide guidance for constitutional democracies elsewhere, not least when peace and prosperity are endangered.
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时 间：民国九十二年六月六日 晚间七时至九时
地 点：台北大学建国校区 社会科学馆一楼 阶梯教室
纪 录：陈怡秀 小姐
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1. from Two Lectures Power/Knowledge (Foucault):
The essential role of the theory of right, from medieval times onwards, was to fix the legitimacy of power; that is the major problem around which the whole theory of right and sovereignty is organized. When we say that sovereignty is the central problem of right in Western societies, what we mean basically is that the essential function of the discourse and techniques of right has been to efface the domination intrinsic to power in order to present the latter at the level of appearance under two different aspects: on the one hand, as the legitimate rights of sovereignty, and on the other, as the legal obligation to obey it. The system of right is centered entirely upon the King, and it is therefore designed to eliminate the fact of domination and its consequences.
2.from Martha Minow, Interpreting Rights: An Essay for Robert Cover,
Yale Law Journal 96 (1987): 1860-1915, 1867.
“Rights” can give rise to “rights consciousness” so that individuals and groups may imagine and act in light of rights that have not been formally recognized or enforced. Rights, in this sense, are neither limited to nor-coextensive with precisely those rules formally announced and enforced by public authorities. Instead, rights represent articulations — public or private, formal or informal — of claims that people use to persuade others (and themselves) about how they should be treated and about what they should be granted. I mean, then, to include within the ambit of rights discourse all efforts to claim new rights, to resist and alter official state action that fails to acknowledge such rights, and to construct communities apart from
the state to nurture new conceptions of rights. Rights here encompass even those claims that lose, or have lost in the past, if they continue to represent claims that muster people’s hopes and articulate their continuing efforts to persuade.
NEW YORK, MARCH 12 – Michael (Michał) Heller, a Polish cosmologist and Catholic priest who for more than 40 years has developed sharply focused and strikingly original concepts on the origin and cause of the universe, often under intense governmental repression, has won the 2008 Templeton Prize. Continue reading →