
Radical Uncertainty

definition of ‘rationality’ based not on observation or introspection, but on a set of a priori axioms. This way of thinking we will describe as ‘axiomatic rationality’. It has the logical consequence that there is something which might be described as ‘subjective expected utility’ which individuals who are ‘rational’ are maximising. Obedience to t
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Knight believed that it was radical uncertainty that created profit opportunities for entrepreneurs and that it was their skill and luck in navigating radical uncertainty which drove technical and economic progress.
Mervyn King • Radical Uncertainty
Under radical uncertainty, the premises from which we reason will never represent a complete description of the world. There will be different actions which might properly be described as ‘rational’ given any particular set of beliefs about the world. As soon as any element of subjectivity is attached either to the probabilities or to the valuation
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And so instead of recognising radical uncertainty, and adopting policies and strategies that will be robust to many alternative futures, banks and businesses are run with reliance on models which claim knowledge of the future that we do not have and never could have.
Mervyn King • Radical Uncertainty
Attitudes towards risk should not be judged by their consistency with a particular set of arbitrary axioms. An extremely small probability of loss is not the same as no risk or loss, and a very high probability of winning is not the same as certainty. People may, and do, differ in their attitudes towards such gambles.
Mervyn King • Radical Uncertainty
Deductive, inductive and abductive reasoning each have a role to play in understanding the world, and as we move to larger worlds the role of the inductive and abductive increases relative to the deductive. And when events are essentially one-of-a-kind, which is often the case in the world of radical uncertainty, abductive reasoning is indispensabl
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The meaning of risk is specific to the individual, household or institution concerned.
Mervyn King • Radical Uncertainty
If the Duke and Marquis had planned to play one hundred games, then the Duke’s three to one advantage at an early stage of the evening would have counted for little. But if there were to be only five games, the Marquis would certainly have lost – the result of the fifth game would be irrelevant, and it might not even have been played.
Mervyn King • Radical Uncertainty
Importance of early results
One reason why this view of risk as volatility has been popular among economists is that it fits well with the notion that the difference between expected utility and expected wealth is a quantitative measure of risk aversion. Risk as volatility can be compounded with risk aversion to yield a monetary value of the cost of risk. This calculation ena
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