On Risk and Uncertainty

A new issue of the journal Judgement and Decision Making was published recently, and one of its articles was this interesting paper by Tim Rakow about the economist Frank Knight. Knight was an economist who is generally credited as being the first to delineate a distinction between "risk" and "uncertainty", with a risky decision being one that involves known probabilities, and an uncertain decision being one that involves unknowable probabilities. Risky decisions seem to me to be more fashionable for psychologists and behavioural economists to research, but I think it's fairly non-controversial to say that uncertain decisions are the ones we face more often in real life.

Rakow makes the point that many of Knight's claims foreshadowed those of more recent cognitive scientists; his description of decision making echoed Herb Simon's later theory of bounded rationality, and his views on risky choice supposedly shared much in common with Kahneman and Tversky's prospect theory. And that's fair enough; Knight was clearly a man ahead of his time.

The argument that Rakow makes at the end of his article, however, is that psychologists should have referred to historical figures such as Knight in pursuit of ideas to stimulate their research. He notes Adam Smith as another thinker who may, similarly, be a fruitful source of hypotheses. Rakow states;

The point is: we should be open to the possibility that the best sources for “fresh” ideas may lay outside the confines of our own discipline, or may be found in literature much older than we typically examine. Decision psychologists have been keen to emphasise that their theories and insights have important implications for economic theory. A reading of Knight’s Risk Uncertainty and Profit emphasises that important psychological insights may manifest themselves in the writing of those who do not describe themselves as psychologists.

Daniel Kahneman and Jonathan Baron both provide commentary on this claim, with Kahneman being the harsher of the two; his response is titled this is not how science is done. There are two ways to read such a title; the first is "scientists do not behave in such a manner!" Which, I believe, is false; as an example that springs to mind, how many contemporary embodied cognition researchers have used Heidegger or Merleau-Ponty for inspiration? The second way of reading Kahneman's response is; "scientists should not behave in such a manner!" A view that may well have some merit, although I'm somewhat hesitant to delve too far into the philosophy of science at the moment. Kahneman's overall comment implies that he intends the first reading, but both Baron and Rakow provide reasons for disagreement.

For what it's worth, I suspect Kahneman, Baron, and Rakow are all correct to a degree - science is, and should be, a conversation, with researchers taking their primary inspiration from facets of that conversation. But secondary inspiration from historical figures isn't necessarily a bad thing, and can provide a source of novel ideas.

Equally, of course, looking for inspiration from history can lead to a dead end. Such is life.

Reference:
Rakow, T. (2010), Risk, uncertainty and prophet: The psychological insights of Frank H. Knight, Judgment and Decision Making, 5(6), pp. 458–466