No one knows what the presidential election will mean for Idaho. Embrace uncertainty | Opinion

The sky is falling. The sky is falling.

Post election, these are the warnings you hear from some, while others predict a glorious future. The truth, of course, is neither group really knows.

Such is a key lesson in economics and finance. The future is uncertain.

As we come to the end of a year and the start of another, I am frequently asked for a perspective on the future of our economy or the stock market. Saying I don’t know doesn’t lead to much discussion or get me invited back.

But what I can talk about is the difference between uncertainty and risk. And I say with confidence that our economy and the stock market are not at risk.

This claim is based on the ideas of economist Frank H. Knight. In his 1921 work entitled “Risk, Uncertainty, and Profit,” Knight explained the differences between risk and uncertainty and why we need to know it to have robust financial markets and economic growth.

Using Knight’s lessons, let’s consider why Idaho’s economy, the nation’s economy and the U.S. stock market are all uncertain but not necessarily risky.

Risk, as Knight explained, refers to situations where outcomes are unknown but measurable through probabilities. In games of chance like dice or cards, probabilities can be precisely calculated and the outcomes managed through statistical methods. In contrast, uncertainty occurs when probabilities are incalculable, that is, when the situation is bound to be unique and complex. Under these conditions past data and sophisticated models cannot reliably predict future events.

Uncertainty requires judgment, creativity and decision-making in the face of the unknowable. The stock market certainly falls into this category; its behavior is influenced by countless variables — many of which are unpredictable, unprecedented and uncontrollable. Economic outcomes cannot be measured with probabilistic accuracy, even when historical data is abundant.

Market pundits like to use historical data to forecast the economy and stock price trends, but these estimates are flawed due to the influence of unforeseeable events like global pandemics, geopolitical conflicts or sudden technological disruptions. The sophisticated statistical models employed at the Federal Reserve and elsewhere will never fully account for these factors.

Consider the financial “meltdown” in the Fall of 2008. Leading up to these events, risk models at banking institutions and the government regulators that oversee them failed to warn anyone. While these models quantified the likelihood of certain outcomes, they could not account for policy uncertainty, the introduction of new and complex financial instruments like credit default swaps, and changing investment opportunities.

If we want economic growth, we have to embrace such uncertainty in the economy and financial markets.

Entrepreneurs and investors alike operate without complete information on market trends, company performance, or macroeconomic conditions. Knight emphasized that entrepreneurial profit will only arise from uncertainty.

Our economy and the stock market reward those who are willing to take bold, informed actions in the absence of clear probabilities. These actions lead to economic growth and greater prosperity for all.

If you want to mitigate risk, tools like diversification, insurance and financial hedges will reduce exposure to known risks. They will not, however, eliminate the fundamental uncertainty in our economy. Our individual success in business or the stock market depends not on mastering risk but on embracing and navigating uncertainty.

So don’t listen to those that claim the sky is falling on you, or think they know how great things will be.

We all thrive when we embrace the uncertain future.