Knowledge and Information: An Unrestricted View

Abstract

So far we have discussed the various definitions of risk together with classifications of the unknown, the historical evolution of risk modelling and how risks are managed in banking and finance. We showed that qualitative inputs such as expertise and insight are consistently disregarded, thus making it difficult to acknowledge and assess the possibility of one-off or rare events, for which there is, by nature, little data, in order to manage uncertainty in the financial industry. We have also elaborated on the possibility that some forms of the unknown can be managed by using a broader range of mathematical tools than currently in use. Although probability can enable us to measure Knightian risk, it is not suitable for ascertaining and quantitatively describing Knightian uncertainty and its impact on broader aspects of risk assessment. Rather, there are a number of varying mathematical approaches for describing the wider notion of uncertainty, which we will review in Chapter 8. Considering the various sources of uncertainty, we recognise that irrespective of the philosophical underpinning, identifying and addressing Knightian uncertainty requires a different approach from that used to manage Knightian risk. We must look through a different set of lenses, including both quantitative and qualitative perspectives. This approach incorporates both what we typically regard to be data and what finance professionals would usually deem to be qualitative inputs based on experience and expertise.