When there are Risk, Uncertainty and Ignorance, which one do you think gets rewarded? Confused with the question? Will you say – Is it obviously Risk that gets rewarded? In my opinion it is Ignorance that gets rewarded.
Imagine a ceramic urn filled with black and white balls. We know precisely half the balls are black and half are white. There are a thousand balls. Five hundred black and five hundred white. If you were to draw a ball at random, what are your chances of drawing a black ball? The chances, don’t you think are fifty-fifty?
Take another urn, filled at some ball factory. In this case all we know is that it contains black balls or white balls or both balls. We have no idea whether most of the balls are white or black. May be all balls are white. May be all balls are black. May be the urn has both white and black balls. Maybe they are evenly divided. May be there is only one ball in the urn. May be there are a thousand balls. We just don’t know. In other words, beyond the fact that there are black and / or white balls in the urn, we do not know anything.
Question is: What are the chances of drawing a black ball from this urn?
Frankly speaking, we do not know what are the chances. There could be hundred percent. There could be zero percent. There could be a percentage anywhere in between.
But if we had to talk of the chances – the chances of drawing a black ball from this urn – will you give ten to one chance that the ball you draw is black? A hundred to one? A hundred percent no chance? What are the chances?
In this case, will we not say the chances are fifty-fifty? In a case where we know nothing, the chances are fifty-fifty, as was in the case of the first urn where we know everything.
In 1920s an economist named Frank H Knight distinguished between Risk and Uncertainty. With Risk we can tame randomness with probabilities. With Uncertainty, we don’t even have the knowledge of probabilities. The important thing as von Neumann and Morgenstern pointed out that in the cases such as the second urn, the Ignorance gets qualified! Both Knowledge and Ignorance become equal!
About the Author
Dr. K. Raja Gopal Reddy is a seasoned internationally qualified Insurance professional. What you are reading here, may not answer all the questions we have, but has the absolute power of asking unsettling questions which increase the interest in the strange world, and show the contradictory wonders lying just below the surface of the commonest things of life. Look at this disturbing but beautiful thought of Friedrich Nietzsche “God is dead. God remains dead. And we have killed him”.
Dr. Reddy can be reached at: raja66gopal@gmail.com
