Knightian

Knightian refers to concepts associated with economist Frank H. Knight and the distinction between measurable risk and unmeasurable uncertainty. In his 1921 work Risk, Uncertainty, and Profit, Knight argued that some events and outcomes can be described with known probabilities (risk), while others are fundamentally unpredictable in terms of probabilistic description (uncertainty). The term "Knightian" is often used as an adjective to describe uncertainties that cannot reasonably be quantified.

Knightian uncertainty arises when the probability distribution of outcomes is unknown or not well defined, making statistical estimation unreliable. In contrast, risk assumes known or estimable probabilities. This distinction has implications for decision making, pricing, and strategic planning: decisions under Knightian uncertainty may rely on precaution, diversification, redundancy, stress testing, scenario analysis, or rules of thumb rather than optimization under a known model.

Applications and related concepts: The idea has influenced fields such as finance, economics, and risk management. In finance, practitioners distinguish between risk-based models and situations of model uncertainty. The term is sometimes connected to ambiguity and the Ellsberg paradox, though some scholars treat ambiguity as a related but distinct notion. Methodologies to cope with Knightian uncertainty include robust optimization, worst-case analysis, and adaptive or learning-based decision processes. Critics argue that the boundary between risk and Knightian uncertainty can be blurred and that some uncertainty can be modeled probabilistically with better information.