The Certainty of Uncertainty

A century ago, Frank Knight wrote a book that put uncertainty in its rightful place at the heart of economics and entrepreneurship. I love that his last name was a homonym of “night,” when objects are hidden by darkness and uncertainty reigns.

Knight’s thinking is as relevant now as it was in 1921, when “Risk, Uncertainty and Profit” was published. We still need tools for coping with uncertainty. Knight’s perspective can guide us to a middle course between trying to avoid uncertainty entirely, which is impossible, and plunging headlong into the darkness, which is reckless.

Knight has been forgotten or misconstrued repeatedly over the past century. A new book by the scholar Amar Bhidé brings back his original insights and dares to try to improve upon them — mostly by extending them into realms that Knight didn’t consider, such as the persuasive techniques that entrepreneurs use to overcome the uncertainty felt by investors, customers and partners. (The cherry-red Tesla Roadster that Elon Musk launched into space in 2018 makes an appearance.)

Last week I interviewed Bhidé about his book, “Uncertainty and Enterprise: Venturing Beyond the Known.” Interviewing him about Knight was like asking Ahab about the white whale in “Moby-Dick,” since Bhidé has been obsessing about Knight since around 1990. At the time, Bhidé was teaching at Harvard Business School and then-dean John McArthur sent him a copy of Knight’s most famous book.

Knight drew a contrast between risk and uncertainty. Risk, he wrote, applies to situations where the probability of an outcome can be measured and therefore insured against. An example is the chance of drawing the queen of hearts from a deck of cards: 1 in 52. Knight applied “uncertainty” to all other unknowns, although he, like Bhidé, was mainly interested in business decisions. Profit, in Knight’s formulation, was the compensation that businesses earned for putting up with uninsurable uncertainty.

“Knightian uncertainty” is a buzz phrase in economics today. Knight is lionized in “Radical Uncertainty: Decision-Making Beyond the Numbers,” a 2020 book by John Kay and Mervyn King. He appeared again this year in the British publication of David Spiegelhalter’s “The Art of Uncertainty: How to Navigate Chance, Ignorance, Risk and Luck.”