Explained: Knightian uncertainty

http://web.mit.edu/newsoffice/2010/explained-knightian-0602.html

by 32ftpersecond • 16 years ago

2 1 16 years ago

web.mit.edu

jayruy• 16 years ago

I appreciate the shout-out to Frank Knight, an under-appreciated genius, but this is nonsense:

"Investment banks that in recent years regarded their own apparently precise risk assessments as trustworthy may have thought they were operating in conditions of Knightian risk, where they could judge the odds of future outcomes."

You can't get a position in risk management without understanding the limitations of the normal distribution baked into every risk calc (eg, 'fat tails'). The disconnect comes when executives ask: "so these numbers mean we can turn it up to 11?!?" and the risk managers who simply shrug and mumble under their breath are the ones who get promoted.

I'm not sure if you can solve this problem, Basel is attempting to by standardizing and publisizing risk calcs.

Explained: Knightian uncertainty

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