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Decision-making is hard because there is a fundamental and unavoidable ignorance about the future.<\/strong> We are especially uncomfortable about outcomes produced by processes that we don’t understand well. We’re much more comfortable with risks that we can quantify, model and forecast. This is called “ambiguity aversion<\/a>“. We are so uncomfortable with the former (uncertainties) that we’ll fool ourselves into believing they’re the latter (risks), with potentially catastrophic results.<\/p>\n When we’re talking about making decisions subject to ignorance, there are two helpful categories, first described by economist Frank Knight<\/a> (1921). There is risk, where we understand the process that produces outcomes and their probabilities.<\/strong> Think about a game of black jack or the average mortality of a 65 year old woman (see page 26<\/a>). We know the probabilities because we understand the mechanics of the card game and have loads of experience with mortality. As a result, we can set odds at a casino and price insurance policies with confidence.<\/p>\n Then there’s another class of ignorance, which is much more profound. Knight called it uncertainty.<\/strong> This characterizes our hardest decisions<\/a>, such as whether to get married, have children, where to live, change a career, rent or buy a home or make an investment. The outcomes depend not just on our own actions but also the unknown actions of others. They depend on known unknowns, e.g., who will be president, and unknown, unknowns<\/a> such as technological developments. Such decisions can be subject to black swans<\/a>, events which are unexpected and can have a major impact.<\/p>\n