"Uncertainty, Risk, and the Financial Crisis of 2008"
CIS Seminar Series
CIS welcomes Peter Katzenstein from Cornell University, and Stephen Nelson from Northwestern University.
The distinction between uncertainty and risk, originally drawn by Frank Knight and John Maynard Keynes in the 1920s, remains of fundamental importance today. In the first part of the article we explain the origins of the concept of uncertainty and how it was criticized and subsequently evolved into a single, dominant model of decision making upon which the dominant risk-based theories of finance and economic policymaking were subsequently built. We argue instead that in the presence of uncertainty market actors and economic policymakers substitute other methods of decision making for rational calculation; specifically, actors’ decisions are rooted in social conventions. The second half of the article provides illustrative evidence, drawn from innovations in financial markets and deliberations among top American monetary authorities in the years before the crisis. The evidence is substantial enough to support the article’s central claim: economic actors and policymakers live in worlds of risk and uncertainty. And in that world social conventions deserve much greater attention than conventional IPE analyses accords them. Such conventions, we conclude, must be part of our toolkit as we seek to understand the preferences and strategies of economic and political actors.
Katzenstein -- http://www.pkatzenstein.org/