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Risk, Uncertainty and Profit
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410 pages, Hardcover
First published January 1, 1921
About the author
Frank H. Knight
30 books26 followersFrank 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.
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Displaying 1 - 14 of 14 reviews
June 15, 2013
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
"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
March 23, 2014
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.
November 28, 2014
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.
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.
January 12, 2021
Brilliant book. Hopefully one day I will write a review that does it justice.
November 2, 2020
[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
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
July 17, 2026
An investor I met through mutual connections recommended this book to me. At first, I expected a classic economics text, but I ended up finding an idea that has stayed with me.
Knight's central insight is surprisingly simple: risk can be calculated, uncertainty cannot. Real entrepreneurial profit doesn't come from taking measurable risks. Itt comes from making good judgments when no one knows the odds.
That idea made me rethink several businesses I've built. Stable, optimized activities tend to produce predictable returns, but the biggest upside usually comes from ventures whose outcomes can't yet be measured. Once everyone understands an opportunity, competition quickly erodes the profits.
It also made me think differently about creative work. Writing novels, building a personal brand, or launching an original product all live in the realm of uncertainty. They may look irrational in the short term, but if they succeed, they create value precisely because nobody could accurately predict the outcome beforehand.
The writing is dated and sometimes heavy, but the core idea still feels remarkably relevant. You can clearly see its influence on later thinkers like Nassim Taleb and Saras Sarasvathy.
If you're interested in entrepreneurship, investing, or decision-making under uncertainty, I think it's well worth reading.
Knight's central insight is surprisingly simple: risk can be calculated, uncertainty cannot. Real entrepreneurial profit doesn't come from taking measurable risks. Itt comes from making good judgments when no one knows the odds.
That idea made me rethink several businesses I've built. Stable, optimized activities tend to produce predictable returns, but the biggest upside usually comes from ventures whose outcomes can't yet be measured. Once everyone understands an opportunity, competition quickly erodes the profits.
It also made me think differently about creative work. Writing novels, building a personal brand, or launching an original product all live in the realm of uncertainty. They may look irrational in the short term, but if they succeed, they create value precisely because nobody could accurately predict the outcome beforehand.
The writing is dated and sometimes heavy, but the core idea still feels remarkably relevant. You can clearly see its influence on later thinkers like Nassim Taleb and Saras Sarasvathy.
If you're interested in entrepreneurship, investing, or decision-making under uncertainty, I think it's well worth reading.
April 2, 2024
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.
to-keep-reference
June 6, 2018Citado en Microeconomic Theory Cap.6
September 6, 2019
Another Robinson Crusoe story of "ideal conditions", "responsibility" and "imputation" written to logically explain away unearned income in a "freely competitive" system.
April 28, 2012
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.
August 12, 2021
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.
May 4, 2020
Profound introduction to economic theory and social thought.
May 10, 2017
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.
Displaying 1 - 14 of 14 reviews