Risk vs. uncertainty

Have you ever read Frank Knight, or the Austrians, and wondered what this distinction is all about?  Neuroscience comes to the rescue:

In the
experiment, test subjects made ambiguous bets while their brains were
scanned using a functional magnetic resonance imager (fMRI).

In one
example, the subjects were given the choice between betting money on
the chances of drawing a red card from a "risky" deck that had 20 red
cards and 20 black cards–that is, where the probability of choosing
either color was 50:50–and making the same bet with an "ambiguous" deck
where the color composition of the cards was unknown.

most cases, the subjects chose to make the risky bet. Logically,
however, both bets would have been equally good because in both cases,
the chance of pulling a red card on the first draw was 50:50.

brain scans revealed that ambiguous wagers were often accompanied by
activation of the amygdala and orbitofrontal cortex (OFC), two areas of
the brain that are involved in the processing of emotions. In
particular, the amygdala has been found to be closely associated with

correlation between aversion to ambiguous decisions and activation of
emotional parts of the brain makes sense from an evolutionary point of
view, Camerer said. "Freezing in the face of danger is an old,
emotional response which probably was evolutionarily adaptive in our
ancestral past."

In the modern human brain, this translates into a reluctance to bet on or against an event if it seems at all ambiguous.

Could this help explain the absence of various long-term insurance markets?  Thanks to  Chris Masse for the pointer.


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