Different theories of financial markets

Reference no: EM1345230

In 1921, economist Frank Knight wrote: ""Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated.... The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating.... It will appear that a measurable uncertainty, or 'risk' proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all." (from Risk, Return and Profit).

To what extent do different theories of financial markets recognize a distinction between risk and uncertainty? And to what extent do real financial markets, and real events occurring in them, show each of the theories to be right or wrong in this respect?

Reference no: EM1345230

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