Knightian uncertainty: through a Jamesian window

Frank Knight is famous for the distinction between risk and uncertainty. In this paper, we argue that Knight’s distinction is different from the one made by those who seek to interpret it within a neoclassical framework. Knight does not reduce ‘true uncertainty’ to the application of (axiomatic) subjective probability. Instead, Knight highlights the power of intuitive judgement in situations of uncertainty. Moreover, Knight conceptualises uncertainty along a continuum which means that many of our real-world problems must be seen as mixed cases of risk and uncertainty. This paper illustrates that Knight’s arguments can be more fully understood through the lens of William James’s psychology, which deeply influenced Knight’s way of thinking. Finally, this paper links Knight’s argument to a growing body of recent empirical literature that shows how effective judgemental–intuitive modes of reasoning are in cases of environmental instability. In doing so, this paper begins to fill out the uncertainty framework, which Knight has sketched in Risk, Uncertainty and Profit (1921).