The renaissance of uncertainty

Mervyn King is working on a new book titled “Radical Uncertainty”. This is the term he applies to Knight’s concept of uncertainty as distinct from risk. In his previous book (The End of Alchemy”), it was one of four key ideas he explored in arguing that the risk based capital requirements at the heart of the of the Basel Committee’s approach to bank regulation are fundamentally flawed.

King argued that any risk based approach to capital adequacy is an unreliable foundation for a banking system because it will not capture the uncertain dimension of unexpected loss and that is what we should be really concerned with. I did a post on his last book here . While I did not agree with everything he wrote, I still still found it well worth reading. His discussion of the “prisoner’s dilemma” is I think particularly relevant to the issue of competition in banking but hardly ever mentioned in the debate that Australia is currently having on this question.

His new book won’t be published till next year but I came across an interesting podcast in which he and John Kay discuss some of the history behind the distinction between risk and uncertainty. The podcast covers a lot of familiar ground, but what I found interesting was the history of how probability based measures of risk pushed uncertainty to the sidelines. In particular, the role that individual personalities played and their relative skills in actively selling their ideas.

The importance of understanding what you don’t (and can’t) know has had a renaissance in the aftermath of the GFC but it is alway helpful (for me at least) to spend some time reflecting on where the line lies and why. I have attached a link to the podcast here for anyone interested in digging deeper.

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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