By Marie-Louise Viero, Queen’s University
“There are known knowns: 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.”
–Donald Rumsfeld, former U.S. Secretary of Defense
Until recently, economic analysis has only been able to deal with known knowns and known unknowns. According to the way uncertainty has been modeled, economic agents (e.g. consumers, managers, investors, etc.) start out with a detailed understanding of all things that can possibly happen. When the agent receives new information, it narrows down that list of possibilities, so that the agent’s knowledge becomes more precise over time. But, the set of possibilities never changes. Economic agents never discover new possibilities that they didn’t recognize before. There are no “unknown unknowns.”Read More »