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3 - From Risk, Uncertainty, and Profit

Published online by Cambridge University Press:  05 June 2014

Randall S. Kroszner
Affiliation:
Booth School of Business, University of Chicago
Louis Putterman
Affiliation:
Brown University, Rhode Island
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Summary

Structures and methods for meeting uncertainty

(From chapter 8)

It is therefore seen that the insurance principle can be applied even in the almost complete absence of scientific data for the computation of rates.…

…The fact which limits the application of the insurance principle to business risks generally is not therefore their inherent uniqueness alone, and the subject calls for further examination. This task will be undertaken in detail in the next chapter, which deals with entrepreneurship. At this point we may anticipate to the extent of making two observations: first, the typical uninsurable (because unmeasurable and this because unclassifiable) business risk relates to the exercise of judgment in the making of decisions by the business man; second, although such estimates do tend to fall into groups within which fluctuations cancel out and hence to approach constancy and measurability, this happens only after the fact and, especially in view of the brevity of a man's active life, can only to a limited extent be made the basis of prediction. Furthermore, the classification or grouping can only to a limited extent be carried out by any agency outside the person himself who makes the decisions because of the peculiarly obstinate connection of a moral hazard with this sort of risks. The decisive factors in the case are so largely on the inside of the person making the decisions that the “instances” are not amenable to objective description and external control.

Type
Chapter
Information
The Economic Nature of the Firm
A Reader
, pp. 52 - 57
Publisher: Cambridge University Press
Print publication year: 2009

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References

Knight, Frank, Risk, Uncertainty and Profit. New York: Houghton Mifflin Co., 1921; eighth impression published by Kelley and Millman, New York, 1957Google Scholar

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