Knightian Uncertainty Revisited

The economist Frank Knight is most widely known for his purported identification of uncertainty that is too dimly understood to permit quantification. While often lauded, this identification is doubly mistaken. First, nearly all economic uncertainty can be quantified as willingness to pay, as Knight implicitly realized. Second, what Knight most emphasized about uncertainty was not its vagueness, but rather its potential transformation through research, innovation, entrepreneurship and good management into objectively verifiable risk. These notions are better captured by extending Knightian uncertainty to embrace most subjective uncertainty and treating its transformation as active, exploratory Bayesian learning