Entrepreneurs, risk managers, and uncertainty
Hyman Minsky offered profound thoughts about the economic dialectic between, as he characterized it, ‘entrepreneurs and bankers.’

Thomas Stanton’s 2012 study of comparative organizational performance during the great 21st-century financial crisis, Why Some Firms Thrive While Others Fail, cites Frank Knight’s 1921 classic, Risk, Uncertainty, and Profit. I consider Stanton’s theme to be how to address the unavoidable reality stated thus by Knight: “Uncertainty is one of the fundamental facts of life. It is … ineradicable from business decisions.”1

As Stanton says, "Knight long ago distinguished risk, which can be quantified, from uncertainty, which requires judgment. Successful firms used judgment to add more protection than quantitative modeling would have suggested."2

Edmund Phelps reflects on Knight’s dictum as follows:

Knight … took the unprecedented position … that most business decisions, especially strategic ones, are to varying degree steps into the unknown. Each of the possible outcomes of a business venture can be considered to have some probability of occurring, but those probabilities are not known.

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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