Risk, Uncertainty and Profit by Knight - Book Report/Review Example

This paper aims to discuss the theory of Frank Knight and his distinction between risk and uncertainty. It also aims to prove through mathematical inquiry to what extent long-term investment appraisal based on discounting techniques is rendered a futile exercise in the valuation of investments.
Download full paper
File format: .doc, available for editing
GRAB THE BEST PAPER97.3% of users find it useful
Risk, Uncertainty and Profit by Knight
Download file to see previous pages At one end is pure risk, sometimes called actuarial risk, in which situation probabilities are capable of being exactly determined on the basis of hard, physical data. At the other end of the continuum is pure uncertainty that, according to Knight, defies analysis. Somewhere in between the two extremes fall most random variables that are encountered in economic problems, depending on their relative uncertainties. These differentiations, however, apparently is not understood or accepted by many researchers due to the apparent confusion between the two concepts in many economic studies today. Methodologies developed for the case of pure risk are often made to apply on problems that are concerned with uncertainty (Taylor, 2002).
To draw distinctions between the concepts of risk and uncertainty, it must be kept in mind that probabilities under condition of pure risk are determinable, while those under condition of pure uncertainty are unmeasurable and therefore unanalyzable; the two are thus not the same, despite the fact that they are interchangeably used in many economic studies.
In moving from the point of pure risk to that of pure uncertainty, three economic modelling issues become apparent, according to Taylor (2002). First, as uncertainty increases, it becomes increasingly difficult to conceptualize and define random variables. In such cases, the set of random variables one analyst would tend to consider as applicable in a case would tend to differ significantly from the set of random variables another analyst would believe appropriate for the same case. Which one of the two conceptual models or sets of random variables is more appropriate becomes a matter of opinion for lack of defining criteria, and will continue to remain a contentious issue until the uncertainties surrounding the case are diminished or removed entirely.
The second issue is that of insurance; in conditions of pure risk, many insurance companies would be able to build a viable market, because determinate risk is insurable, and in fact, it is the presence of risk that makes insurance necessary. However, in the case of pure uncertainty, no insurance firm would venture to extend the coverage. In fact, as uncertainty increases along the continuum, the cost of premiums would move to higher and higher levels until the point where they present a moral hazard.
The third issue that creates problems for modelling is that as uncertainty increases, the estimation or specification of probabilities become increasingly involved and difficult, whether objectively or even subjectively, as to be almost arbitrary. While, as Taylor points out, frequentists and Bayesian theorists contend that no matter how high the uncertainty, a probabilities specification could always be subjectively arrived at, this has understandably been called into question in the ensuing philosophical debates.
In contrast with Taylor's depiction of Knight's theory as a two-attribute, linear, continuum, Norman and Shimer (1992) explains that Knight actually considered three types of probability: aside from uncertainty and risk, there is also statistical probability. In differentiating the ...Download file to see next pagesRead more
StudentShare Professional Writing Service is the right decision for you! Only from $14,99/page for a 100% unique and relevant paper. Enter your email, choose essay type and get your personal 20% discount
on on expert writing!
Cite this document
  • APA
  • MLA
(“Risk, Uncertainty and Profit by Knight Book Report/Review”, n.d.)
Risk, Uncertainty and Profit by Knight Book Report/Review. Retrieved from https://studentshare.org/literature/1513636-risk-uncertainty-and-profit-by-knight
(Risk, Uncertainty and Profit by Knight Book Report/Review)
Risk, Uncertainty and Profit by Knight Book Report/Review. https://studentshare.org/literature/1513636-risk-uncertainty-and-profit-by-knight.
“Risk, Uncertainty and Profit by Knight Book Report/Review”, n.d. https://studentshare.org/literature/1513636-risk-uncertainty-and-profit-by-knight.
  • Cited: 0 times
Click to create a comment or rate a document

MORE SAMPLES OF TOPIC: "Risk, Uncertainty and Profit by Knight"

Managing uncertainty

..., millennial are more willing to take risks and highly educated compared to the preceding generations. These differences are bound to result in some friction at the workplace, where in the past it has been noted that organizations have opted to leave them to resolve themselves. However, this is proving to be unfruitful as millennial are leaving the workforce to start their own businesses and operate as consultants. Having realized their importance, organizations have to identify ways of attracting and retaining this workforce as well as ensuring they work in cohesion with the older generation (Cahill et al 2012, p.4). Popular social science has attempted to categorize the living generations into five- matures/veterans or...
4 Pages(1000 words)Essay
Read More…

Risk & Uncertainty - Microeconomics 3rd Year

...Risk and Uncertainty Question Explain the proposition that if insurance is not costless to provide, risk-averse Expected Utility maximizers may optimally choose to have full insurance coverage, partial insurance coverage, or no coverage at all, depending on how the cost of providing insurance is related to the coverage offered. An individual is regarded as being risk averse if he prefers to have the expected value of his wealth rather than face a gamble. Taking out insurance is seen as a gamble. Insurance covers the insured against loss caused by an incident such as fire and earthquake. The expected utility function has some very convenient properties of analysing choice...
4 Pages(1000 words)Essay
Read More…

(Continuous Uncertainty)

...Continuous Uncertainty – Assumptions and their Effects in Dhahran Roads Project Dear Hassan Malik Thank you for your cooperation in taking out the time to review the forecasted cash flows for Dhahran Roads project. I tried to put my best efforts with realistic views to answer your concerns and issues regarding the assumptions that have been made while projecting these cash flows. Kindly take a closer look towards the following justifications that have been produced in the form of a report. Regards Hira Khurshid Introduction Since Net Present Value technique is an absolute cash flows forecasting technique which requires certain assumptions. These assumptions are based upon the expected and foreseeable global and local...
3 Pages(750 words)Assignment
Read More…

Perception and Evaluation of Risk and Uncertainty

...Perception and Evaluation of Risk and Uncertainty (College Perception of Risk Technological, chemical and nuclear development has brought about serious and long lasting damages to the earth and those that inhabit it. These damages demanded a creation of a new intellectual discipline called risk assessment. Perception of risk among people differs. There are people who oppose technology due to the risks involved with them. They believe through complex technologies that are unfamiliar to them, they face more risk today than in the past and that future risks will be greater than todays (Slovic, 1987, 280). A...
2 Pages(500 words)Essay
Read More…

Risk Assessment for Non-profit Hospital

..., the writer holds the view that since hospital is a non-profit organization, it cannot afford huge technology investments to promote the privacy of personal health records. The author recommends that frequent risk assessment can be a potential technique to promote patients’ confidentiality and to cut down security costs. 18. Johns, M. L. (2002). “Security, audit, and control of health data”. Chapter 9. P. 318. Information Management for Health Care Professions. Cengage Learning. In his book, Johns states that information management is of particular importance in the field of health care. The writer adds that security is a prime feature of information management. The book recommends that...
5 Pages(1250 words)Essay
Read More…

Risk and uncertainty

... launch. Similarly, the firm can use modern advertising tools to limit its risk/uncertainty exposure considerably. Evidences suggest that online based advertising techniques can benefit companies to obtain an initial boost in sales and thereby make the product recognizable in the market. In addition, hiring celebrities like soccer players or film actors to appear in the Ads of the product is also a better strategy today. Works Cited Knight, Frank H. Risk, Uncertainty and Profit. Courier Dover Publications, 2012. Print.... Risk and Uncertainty Major Differences Risk and uncertainty are two distinct concepts, and hence these terms are not interchangeable. As...
2 Pages(500 words)Essay
Read More…
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Book Report/Review on topic Risk, Uncertainty and Profit by Knight for FREE!

Contact Us