Uncertainty is when there is little consistent data, probability distributions are unknown and statistical analysis must be replaced by intuition and instinct.
Rumsfeld’s risk categorization grid
There are known knowns; there are things we 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.
— It’s What You Don’t Know That Matters, David Blitzer, S&P
Former U.S. Secretary of Defense Donald Rumsfeld omitted one important case, the unknown knowns. These are boundary values, that are believed to hold with absolute certainty. Sometimes they don’t. Economic models and financial markets do not operate under the same binding structural constraints of physical systems.
These are the truths that aren’t…