, Columnist
When Risk-Off Dominates Markets, Economies Usually Suffer
When risk is not measurable, the distribution of possible outcomes is highly uncertain.
Markets and uncertainty.
Photographer: Michael Nagle/Bloomberg via Getty ImagesThis article is for subscribers only.
Rising tensions with North Korea should have investors boning up on the “Knightian uncertainty” hypothesis named after Chicago economist Frank Knight, who argued that when risk is not measurable, the distribution of possible outcomes is highly uncertain.
In these situations, investors typically seek out the safest of assets. But that has implications for the economy, including curbing gross domestic product growth and contributing to a rise in unemployment as investors flee riskier assets. Such were results from a study by the Federal Reserve a few years ago that looked at periods when there was a flight to safety in 23 countries over a span of 30 years.