What can we learn from a little-known economist’s book published exactly a century ago? Quite a lot. Is it useful for us today? Yes, very. It turns out that Risk, Uncertainty and Profit, published by Frank Knight in 1921, is an essential book, even if it is difficult to read. It is the first book to really define uncertainty and show what it means in decision making and how it explains profit.(more…)
The coronavirus, which is currently causing a major international crisis, is one of those unprecedented events that are taking us by surprise by making all the forecasters lie who, only three months ago for the New Year, were telling us what 2020 would be like. Should we be afraid of the virus? This is the question that each of us is asking, torn between the worry of not taking seriously what could turn out to be the epidemic of the Century and the fear of giving in to panic if its impact proves to be only modest, as Dr. Eric Caumes, head of the infectious diseases department at the French Hospital Pitie-Salpetriere, who recently declared: “If you are not afraid of the flu (up to 10.000 deaths/year in France), why are you afraid of the coronavirus?” This seems to make sense, and yet the comparison is not legitimate, because it ignores a very important distinction, that between risk and uncertainty, which a decision-maker must absolutely understand.