Knightian Uncertainty
A distinction drawn by Frank Knight (1921) between RISK (probability distributions are known, as with coin flips or well-calibrated historical data) and UNCERTAINTY (probability distributions are unknown, as with novel asset classes, regime changes, or geopolitical events without historical analogue). Standard quantitative models -- VaR, mean-variance optimization, Black-Scholes -- assume risk in the Knightian sense; recognizing when you are in uncertainty rather than risk should push you toward broader diversification, extra cash buffers, and a humbler stance on portfolio sizing.
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Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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