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Ambiguity—The Unknown Unknown

Unlike the typical political figure, the one who speaks undeclared soundbites Rumsfeld adopted an almost professorial tone. The most famous example occurred in a press conference in February 2002.

Donald Rumsfeld on the unknown unknown

Donald Rumsfeld was one of the more controversial US cabinet members of the past few decades. He served terms as a Secretary of defense in both the 1970s and to thousands, becoming the civilian administrative leader of the US military in several wars in many smaller conflicts.

During those turbulent times there were many opportunities for controversy, many difficult decisions that Rumsfeld had to justify to a skeptical public, but Rumsfeld won’t be remembered just for controversial decisions themselves he’ll also be remembered for his manner of explaining those decisions, a way of speaking that was unique in recent politics.

Unlike the typical political figure, the one who speaks undeclared soundbites Rumsfeld adopted an almost professorial tone. The most famous example occurred in a press conference in February 2002. Rumsfeld was pressed by a question about whether there was any evidence that Iraq had supplied terrorist organizations with weapons of mass destruction or even any evidence of the Iraqi government any link to those terrorist groups.

He began his answer in typical politician speak “reports that say that something hasn’t happened are always interesting to me because as we know…” and then he suddenly says something remarkable “…there are no notes there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know”. What an amazing quote!

The nature of uncertainty

Let’s unpack his quote into three parts. First there are known knowns the things we know we know. That one is straightforward, “known knowns” are certain events, those for which we can confidently predict what would happen. Second there are known unknowns things we know we don’t know.

Knowledge that we know we don’t have, that sounds like risk. We don’t know what’s going to happen when we bet on the roulette table our move money from bonds to stocks, but we know that we don’t know. That sort of uncertainty can be managed using strategies like those from the last lecture. Okay now to the third and key part.

There are unknown unknowns, the ones we don’t know we don’t know. What could that mean? By definition an unknown unknown isn’t risky because we don’t know and can’t estimate the probabilities. It is something else but what? Will consider exactly what this can mean in today’s article.

As an epilogue Donald Rumsfeld was pilloried in the media for this quote. A British group even recognized him with its annual put in the mouth award, and several online sites reorganize this statement into a sort of political free verse poetry, but in the end it became a defining quotation form he even use an excerpt as a title of his autobiography “Known an Unknown”.

Balancing goals in decision-making

Now let’s move back in time to the year 1921. The United States had recently exited World War I and was suffering for a brief but acute economic depression.

Economics as a field at that time had the great challenge of balancing two disparate sets of goals: it’s off the elegance and mathematical clarity of the hard sciences like physics but it also sought to be applicable to real-world policies and institutions like the other social sciences.

The economist Frank Knight sought to bring these two goals together at least conceptually in his book: Risk, uncertainty and profit. Knight’s key insight was that there were actually two distinct types of uncertainty: measurable uncertainty, decisions where the probably some potential outcomes are known or could be estimated was called risk.

That’s the same definition I used in the previous lecture, but there was another type of unmeasurable uncertainty. Knight argues that there are decisions that we know could lead to different outcomes, but for which we do not know the probabilities and, importantly cannot estimate those outcome probabilities, we don’t know and cannot readily estimate what we don’t know.

Knight referred to this second type of decision as involving uncertainty and economists sometimes call it Knightian uncertainty, but we’re gonna call it ambiguity.