Risk, Uncertainty and Profit

by Frank H. Knight

Risk, Uncertainty And Profit is a book written by Frank Hyneman Knight, an American economist, and published in 1921. The book is considered a classic in the field of economics and is widely regarded as one of the most important works on the theory of entrepreneurship.In the book, Knight distinguishes between risk and uncertainty, arguing that risk can be quantified and managed through the use of probability theory, while uncertainty cannot. He argues that entrepreneurs are able to profit from uncertainty by making decisions based on their own judgment and personal experience, rather than relying solely on statistical analysis.Knight also explores the role of competition in the market, arguing that it is necessary for economic growth and innovation. He discusses the concept of perfect competition and the limitations of this model in the real world, as well as the importance of monopolies and the potential for abuse of market power.Overall, Risk, Uncertainty And Profit provides a comprehensive analysis of the nature of entrepreneurship and the role it plays in the economy. The book remains relevant today and is widely cited by economists and business scholars.This Is A New Release Of The Original 1921 Edition.This scarce antiquarian book is a facsimile reprint of the old original and may contain some imperfections such as library marks and notations. Because we believe this work is culturally important, we have made it available as part of our commitment for protecting, preserving, and promoting the world's literature in affordable, high quality, modern editions, that are true to their original work.

Genres: Economics, Finance, Business, Nonfiction, Entrepreneurship, History, Class

408 pages, Hardcover

First published January 1, 1921

About the author

Frank Hyneman Knight was an American economist and professor at the University of Chicago. Amongst his students were several Nobel Prize laureates: Milton Friedman, George Stigler and James M. Buchanan.

Reviews

[Sean Rosenthal · Rating 4 out of 5]

Interesting Quote:

"With uncertainty absent, man's energies are devoted altogether to doing things; it is doubtful whether intelligence itself would exist in such a situation; in a world so built that perfect knowledge was theoretically possible, it seems likely that all organic readjustments would become mechanical, all organisms automata. With uncertainty present, doing things, the actual execution of activity, becomes in a real sense a secondary part of life; the primary problem or function is deciding what to do and how to do it."

-Frank Knight, Risk, Uncertainty, and Profit

[Katherine Collins · Rating 5 out of 5]

Knight’s book can be hard to find, but this is some of the best original work distinguishing risk from uncertainty – the “known unknowns” versus the “unknown unknowns.” If you are interested in resilience, systems thinking, or some of the fatal flaws in many approaches to finance, this is important stuff.

[Nils · Rating 4 out of 5]

Famous for its central distinction between RISK (which is measurable, and therefore hedgeable) and UNCERTAINTY (which is truly unknown), this book turns out to be really a long defense of the role of the entrepreneur in a private property system. The entrepreneur, in Knight's account, is the person who is adept at exercising good judgment and effective organizational control in the face of radical uncertainty. In other words, he is not, strictly speaking, a "risk-taker" so much as he is a person willing to dwell in and deal with uncertainty. Entrepreneurship is thus utterly different from the insurance business.

It is filled with wonderful, still-timely aperçus:
"In the field of social science... The ignorant will not in general defer to the opinion of the informed." (13)
"Mathematical economics seems likely to remain little more than a cult." (14)
"We do not react to past stimulus, but to the 'image' of a future state of affairs... We react not to what we perceive, but always to what we infer." (201)
"It is better for two men to lose one eye than for one to lose two, and a system of production which wounds a larger number of workers and kills a smaller number is to be regarded as an improvement." (239)
"Modern society is organized on the theory (whatever the facts, about which some doubt may be expressed) than men predict the future and adapt their conduct to it more effectively when the results accrue to themselves than when they accrue to others." (240)
"When the managerial function comes to require the exercise of judgment involving liability to error, and when in consequence the assumption of responsibility for the correctness of his opinions becomes a condition prerequisite to getting the other members of the group to submit to the manager's direction, the nature of the function is revolutionized; the manager becomes an entrepreneur." (276)
"What we call 'control' consists mainly of selecting someone else to do the 'controlling.' Business judgment is chiefly the judgment of men." (291)
"The operative's ability to handle his job cannot be known with complete accuracy to his superior.... The knowledge on which the higher control is based is knowledge of a man's capacity to deal with a problem, not concrete knowledge of the problem itself." (295-6)
"The true uncertainty in organized life is the uncertainty in an estimate of human capacity, which is always a capacity to meet uncertainty." (309)
"Candid consideration of the difficulties of radical transformation, especially in view of our ignorance and disagreement about what we want, suggests caution and humility in dealing with reconstruction proposals." (375 - last line of the book.)

For extra fun, it contains several sharp digs at "the new science of behavior" that was then first being promulgated by Knight's University of Chicago colleague Charles Merriam, which would eventuate in the behavioral science revolution thirty years later.

[Otto Lehto · Rating 5 out of 5]

Brilliant book. Hopefully one day I will write a review that does it justice.

[Liquidlasagna · Rating 5 out of 5]

[found in the following list]

Books with the best decision theoretic and philosophical foundation
by Michael Emmett Brady

The following books will provide an optimal understanding of how one should study and organize the data and observations that comprise the social sciences. These books provide a broad foundation in logical, epistemological, and philosophical techniques that are sound and valid. A reader who masters these books will quickly grasp the complex, dynamic, nonlinear aspects of social science systems as they evolve through time.

1. The General Theory of Employment, Interest, and Money - John Maynard Keynes
2. A Treatise on Probability - John Maynard Keynes
3. Risk, Uncertainty and Profit - Frank H. Knight
4. The Theory of Economic Development - Joseph A. Schumpter
5. The Wealth of Nations - Adam Smith
6. Risk, Ambiguity and Decision - Daniel Ellsberg
7. The (Mis)behavior of Markets - Beniot Mandelbrot and Richard L. Hudson
8. Probability, Econometrics and Truth - Hugo A. Keuzenkamp
9. The Unbround Prometheus: Technological Change and the Industrial Development in Western Europe from 1750 to the Present - Second Edition - David S. Landes
10. The Laws of Thought - George Boole
11. The Black Swan - Nassim Nicholas Taleb
12. Fooled by Randomness - Nassim Nicholas Taleb
13. J.M. Keynes Theory of Decision Making, Induction and Analogy - Michael Emmett Brady

[Alex · Rating 4 out of 5]

3.5 stars maybe, rounded up as the core ideas of the text are important. This was a more difficult read than it needed to be, due to the combination of the language patterns (many paragraph-length sentences with difficult parses) and the typesetting (tiny margins on excessively large pages, for unknown reasons). The introductory chapters covering general economic theory are (in my opinion) much more clearly explained in standard texts, and were (again in my opinion) not strictly necessary to the arguments about uncertainty and its relation to "true" profit in the latter portion of the book. It was in any event interesting to read the source material after having heard multiple references to Knight in various finance classes.

[Leonardo]

Citado en Microeconomic Theory Cap.6

[Tommy · Rating 2 out of 5]

Another Robinson Crusoe story of "ideal conditions", "responsibility" and "imputation" written to logically explain away unearned income in a "freely competitive" system.

[Kurishin · Rating 3 out of 5]

To get to Knight's thinking on behavorial economics, you have to wade through some rather basic stuff in the beginning and middle chapters. His thinking would now be deemed standard but he was ahead of his time and he can be a starting point though others have further developed his ideas.

[Duncan Berry · Rating 5 out of 5]

One of my new favorites. Tempted to dive into FHK for the next couple of weeks, but that will have to do for the time being. I rank this book up there with my all-time favorites in economics: Smith's Theory of Moral Sentiments, Menger's Principles, Bastiat's Harmonies, Mises's Liberalism and Human Action, Rothbard's Egalitarianism and Man, Economy and State, as well as Hoppe's Theory of Socialism and Capitalism and The Great Fiction.

[Dennis · Rating 4 out of 5]

http://pro-libertate.net/20140304/230...

[James W Vice Jr · Rating 5 out of 5]

Profound introduction to economic theory and social thought.

[Rafid Hamika · Rating 5 out of 5]

Knightian uncertainty and the role of the entrepreneur and profit. It took me days to figure this book out. Knight jumps around, lots of repetitiveness, but when you grasp his points it changes everything.