“We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little.” – Frank Knight, Risk, Profit, and Uncertainty (1921)
Many state that the difference between risk and uncertainty is the degree in which a decision (or scenario) can be forecasted based on a highly controllable environment. The farther out the decision (i.e. projections going past 18 months can spell trouble) the more we lose sight of risks, and the fog of uncertainty takes over our vision of the future.
We cannot know what we cannot know about the future. There is no scenario in economics or any other decision arena where perfect information exists. According to Frank Knight, with action regarding future events it simply comes down to opinion, “… neither entire ignorance nor complete and perfect information, but partial knowledge.” (Knight, 1921)
To understand uncertainty we must understand the level of knowledge applied to decisions about the future. If we base decisions solely on intuition and “gut feelings” we are pushing risks more towards uncertainty, as there is no quantifiable information to assist with decision making.
Too much quantifiable information and we can lose sight of other contexts which can lead to better future forecasts. In essence, in every decision, we are leveraging partial knowledge about the future. How we construct this knowledge determines if we are properly weighing risks or if we are simply running through uncertainty fog and hoping we don’t trip on our path to the end.