Risk, uncertainty and prophet: The psychological insights of Frank H. Knight

Tim Rakow*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)

Abstract

Economist Frank H. Knight (1885-1972) is commonly credited with defining the distinction between decisions under "risk" (known chance) and decisions under "uncertainty" (unmeasurable probability) in his 1921 book Risk, Uncertainty and Profit. A closer reading of Knight (1921) reveals a host of psychological insights beyond this risk-uncertainty distinction, many of which foreshadow revolutionary advances in psychological decision theory from the latter half of the 20th century. Knight's description of economic decision making shared much with Simon's (1955, 1956) notion of bounded rationality, whereby choice behavior is regulated by cognitive and environmental constraints. Knight described features of risky choice that were to become key components of prospect theory (Kahneman & Tversky, 1979): the reference dependent valuation of outcomes, and the non-linear weighting of probabilities. Knight also discussed several biases in human decision making, and pointed to two systems of reasoning: one quick, intuitive but error prone, and a slower, more deliberate, rule-based system. A discussion of Knight's potential contribution to psychological decision theory emphasises the importance of a historical perspective on theory development, and the potential value of sourcing ideas from other disciplines or from earlier periods of time.
Original languageEnglish
Pages (from-to)458-466
Number of pages9
JournalJudgment And Decision Making
Volume5
Issue number6
Publication statusPublished - Oct 2010

Keywords

  • Amos Tversky
  • Bounded rationality
  • Daniel Kahneman
  • Decision making
  • Decision psychology
  • Herbert Simon
  • Nobel Prize
  • Prospect theory
  • Homo economicus

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