Risk And Uncertainty From The Signal And The Noise By Nate Silver

English: Nate Silver in Washington, D.C.

English: Nate Silver in Washington, D.C. (Photo credit: Wikipedia)

I was sitting at my desk last evening and picked up The Signal And The Noise by Nate Silver and on page 29 ran across the best comparison between risk and uncertainty. I have never heard it explained better.

Risk, as first articulated by the economist Frank H. Knight in 1921, is something that you can put a price on. Say that you’ll win a poker have unless your opponent draws to an inside straight: the chances of that happening are exactly 1 chance in 11. This is risk. It is not pleasant when you take a “bad beat” in poker, but at least you know the odds of it and can account for it ahead of time. In the long run, you’ll make a profit from your opponents making desperate draws with insufficient odds.

Uncertainty, on the other hand, is risk that is hard to measure. You might have some vague awareness of the demons lurking out there. You might even be acutely concerned about them. But you have no real idea how many of them are or when they might strike. Your back-of-the-envelope estimate might be off by a factor of 100 or by a factor or 1,000; there is no good way to know. This is uncertainty. Risk greases the wheels of a free-market economy; uncertainty grinds them to a halt.”

I know in my life, I certainly need to apply these principles in my decision-making process in business decisions and as well as using tax payer dollars in county decisions.

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