Knight on Risk and Uncertainty

Abstract

It is argued that the received interpretation of Knight's classic riskuncertainty distinction-as concerning whether or not agents have subjective probabilities-constitutes a misreading of Knight. On the contrary, Knight shared the modern view that agents can be assumed always to act as if they have subjective probabilities. We document our contention that by uncertainty Knight instead meant situations in which insurance markets collapse because of moral hazard or adverse selection. Knight's discussion of market failure, although always informal and in places inaccurate, was in many respects a remarkable anticipation of the modern literature.