Even-Keeled Moments of Doubt

3 Pages Posted: 13 May 2017  

James Ming Chen

Michigan State University - College of Law

Date Written: May 12, 2017

Abstract

Uncertainty affects all aspects of economics. A principle this vital demands a mathematically precise definition. The distinction between risk and uncertainty, as made by Frank Knight (1921) and John Maynard Keynes (1937), invites the following definition (Anderson, Ghysels & Juergens 2009): An event is risky if its outcome is unknown but the distribution of its outcomes is known. By contrast, an event is uncertain if its outcome is unknown and the distribution of its outcomes is also unknown. In fat-tailed problems where historical evidence does not reflect the true distribution of extreme outcomes, kurtosis approximates uncertainty. This intuition arises from options pricing models where both price and volatility fluctuate stochastically (Heston 1993).

Suggested Citation

Chen, James Ming, Even-Keeled Moments of Doubt (May 12, 2017). Available at SSRN: https://ssrn.com/abstract=2967244 or http://dx.doi.org/10.2139/ssrn.2967244

James Ming Chen (Contact Author)

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

Paper statistics

Downloads
14
Abstract Views
430