Field Note #16. On "Knightian Risk, Uncertainty, Profit" (+ Crypto)

Source: Frank H. Knight, Risk, Uncertainty and Profit (1921)

  • Uncertainty is the inherently unknowable, impenetrable by increasingly refined analysis.
  • The rewards of engaging with true uncertainty is the source and justification for entrepreneurial profits
  • It is a mistake to treat induction and deduction as exclusive methods.  Rather, both are insufficient and yet, both are required.  Over-indexing to induction favors concreteness at the exclusion of principled reasoning.  Over-indexing to deduction favors generalization at the expense of supportive evidence.
  • Perhaps, one must realize the interaction between inductive and deductive lenses is endless & paradoxically stable only in its instability.
  • Analogy is the animating force behind reasoning.  The imprecision of analogy means that cold machine-like certainty is a ruse.  At the same time, the imprecision is what allows for possibility, serendipity, and tail events (positive & negative).
  • Despite the desire to reduce uncertainty, the irony is that our life would be far less appealing without it.
Implications for (My) Crypto Investing & Analysis
In crypto markets, my working hypothesis (inductively & deductively generated) is that there are essentially 3 choices I have *personally* confronted over time: (a) opt-out of the crypto market regime on grounds that it is too uncertain, (b) engage and delude myself with subtle self-righteous attitude to finding the “holy grail” or “Rosetta stone" (i.e., reduce uncertainty to atomic unit of calculable risk), or (c) engage and in a Wu Wei like fashion, "redirect" the uncertainty through humble heuristics and non-concentrated position sizing, combined with putting both skin and soul in the game.  I choose c.
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