As discussed in the previous article, Knight and Keynes were among the first to recognize the critical importance of the uncertainty factor and became critics of the equilibrium approach to economics and optimization models. In their understanding, the problem of uncertainty was supposed to become a bridge connecting economics, philosophy, psychology, and everything related to approaches to human decision-making. "Uncertainty can be a guiding light." U2 (Zooropa album) Many years have passed since then, but the concept of "uncertainty" was often replaced by "risk". As a result, we are all witnessing the rapid development in recent decades of a relatively new direction in business and finance - risk management, although it would be more useful to develop "management of uncertainty". According to Nassim Taleb, risk specialists - "risk takers" - transfer the ideal mathematical model to real life. And in the end they fail. The theory of games and the Gaussian distribution (normal distribution) work only in certain "sterile" cases, such as casinos, where we face exactly the risk, that is, a small part of all uncertainty that can really be calculated. The study of uncertainty, according to Taleb, on the example of gambling is absurd, because risk is only a tiny fraction of the overall uncertainty. Alan Greenspan (Chairman of the US Federal Reserve, 1987-2006) put it this way after the 2008 crisis: “We have gone far from the serene 1960s, when everyone believed that econometric models would open up new opportunities and make it possible to accurately judge the future. ... After reality repeatedly brought us forecasters back to earth, confidence in the ability to see beyond our own nose diminished. " At that time, the US Secretary of Defense, Donald Rumsfeld in 2002, expressed one philosophical idea very clearly: “There are “known known” - events that we know that we know them. There are also “known unknown” - events about which we know that we do not know them. But there are “unknown unknown” too - these are events about which we do not know that we do not know them. " Photo: Donald Henry Rumsfeld (Former US Secretary of Defense) Since then, the "Known and Unknown" or "Rumsfeld Matrix" approach has emerged, in which all events that happen in our world are divided into four groups or segments. In only one of the four segments of Known Known, there is no uncertainty, there is only risk. Uncertainty reigns in three of the four segments of the matrix. Somewhere more, somewhere less. And it is extremely problematic or impossible to determine the probabilities of the outcomes of events in them. Moreover, in the Unknown Unknown segment, we do not even know the outcomes of what events we need to evaluate, what can we say about determining the probability of these outcomes! Rumsfeld Matrix It is believed that a senior NASA engineer once told Rumsfeld about the uncertainty and risk separation structure before the latter used it at a famous press conference in 2002. Rumsfeld certainly made this approach more popular than NASA. NASA itself uses the matrix as part of risk and uncertainty analysis in space missions, especially to identify unknown unknowns, for example, during the return trip of the space shuttle. They focus on moving unknowns to a better known or studied area, thereby reducing the level of uncertainty. NASA follows the Rule of Avoiding Uncertainty, which states that an organization or a person always prefers choices under risk over choices under uncertainty. Typically, this can be achieved by turning uncertainty into risk by gaining additional knowledge about the situation and using this knowledge.
I think I know ... that the first choice has one too many "know"'s You know don't know that you don't know enough about markets I think I also know far better reading sources covering risk such as these two: Against The Gods - The Remarkable Story of Risk, Peter L Bernstein. Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay
Totally correct, thanks for spotting it out! Unfortunally, poll choices can't be chanhed at this time.