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Risk, uncertainty and prophet: The psychological insights of Frank H. Knight

Rakow, Tim (2010) 'Risk, uncertainty and prophet: The psychological insights of Frank H. Knight.' Judgment and Decision Making, 5 (6). pp. 458-466. ISSN 1930-2975

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Economist Frank H. Knight (1885–1972) is commonly credited with defining the distinction between decisions under “risk” (known chance) and decisions under “uncertainty” (unmeasurable probability) in his 1921 book Risk, Uncertainty and Profit. A closer reading of Knight (1921) reveals a host of psychological insights beyond this risk-uncertainty distinction, many of which foreshadow revolutionary advances in psychological decision theory from the latter half of the 20th century. Knight’s description of economic decision making shared much with Simon’s (1955, 1956) notion of bounded rationality, whereby choice behavior is regulated by cognitive and environmental constraints. Knight described features of risky choice that were to become key components of prospect theory (Kahneman & Tversky, 1979): the reference dependent valuation of outcomes, and the non-linear weighting of probabilities. Knight also discussed several biases in human decision making, and pointed to two systems of reasoning: one quick, intuitive but error prone, and a slower, more deliberate, rule-based system. A discussion of Knight’s potential contribution to psychological decision theory emphasises the importance of a historical perspective on theory development, and the potential value of sourcing ideas from other disciplines or from earlier periods of time.

Item Type: Article
Uncontrolled Keywords: decision making; decision psychology; bounded rationality; prospect theory; Nobel Prize; Herbert Simon; Daniel Kahneman; Amos Tversky; homo economicus
Subjects: B Philosophy. Psychology. Religion > BF Psychology
Divisions: Faculty of Science and Health > Psychology, Department of
Depositing User: Jim Jamieson
Date Deposited: 29 Nov 2011 18:43
Last Modified: 16 Dec 2014 11:19

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