Blogging the Bookshelf

Blogging my bookshelf – one book at a time

Blogging the Bookshelf header image 2

Risk and Uncertainty – “The Signal and the Noise: The Art and Science of Prediction”, Nate Silver

November 16th, 2012 · No Comments · Data, Prediction

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 hand 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 there are or when they might strike. Your back-of-the-envelope estimate might be off by a factor of 100 or by a factor of 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.

Tags: ····

No Comments so far ↓

Like gas stations in rural Texas after 10 pm, comments are closed.