Risk, Uncertainty–From Governor Weld to the Modern Financial System

Canadian academic Thomas Homer-Dixon (we will read one of his papers this semester in Intro to IR) has written a piece for Canada’s “paper of record”–the Globe and Mail, which is titled “From Risk to Uncertainty.”  Those of you in my intro to comparative politics class will surely recognize immediately the difference between the tho concepts.

Remember when we read the first two chapter of Shepsle and Bonchek on instrumental rationality, the authors used the example of then-Massachusetts Governor Weld.  Weld had to decide whether to run for Governor again, or to commit to challenging Democratic Senator Ted Kennedy’s Senate seat.  A win there would have given him a nice platform for an eventual presidential run.  Weld, as we know, was operating in a world or risk rather than uncertainty when making his decision, given that there were public opinion polls published that estimated his chances of winning in either election.

What is the difference between risk and uncertainty and how does it apply to the contemporary global financial system (which, by the way, for those of you not paying attention is precariously teetering on the edge of meltdown–you heard it here first!)?

So the rules of the game have now fundamentally changed. Our global financial system has become so staggeringly complex and opaque that we’ve moved from a world of risk to a world of uncertainty. In a world of risk, we can judge dangers and opportunities by using the best evidence at hand [what Shepsle and Bonchek call beliefs] to estimate the probability of a particular outcome. But in a world of uncertainty, we can’t estimate probabilities, because we don’t have any clear basis for making such a judgment. In fact, we might not even know what the possible outcomes are. Surprises keep coming out of the blue, because we’re fundamentally ignorant of our own ignorance. We’re surrounded by unknown unknowns.