Against the Gods: The Remarkable Story of Risk

Chapter 14

The Man Who Counted Everything Except Calories

We have just witnessed Frank Knight’s determination to elevate uncertainty to a central role in the analysis of risk and decision-making and the energy and eloquence with which Keynes mounted his attack on the assumptions of the classical economists. Yet faith in the reality of rational behavior and in the power of measurement in risk management persisted throughout all the turmoil of the Depression and the Second World War. Theories on these matters now began to move along sharply divergent paths, one traveled by the followers of Keynes (“We simply do not know”) and the other by the followers of Jevons (“Pleasure, pain, labour, utility, value, wealth, money, capital, etc. are all notions admitting of quantity.”)

During the quarter-century that followed the publication of Keynes’s General Theory, an important advance in the understanding of risk and uncertainty appeared in the guise of the theory of games of strategy. This was a practical paradigm rooted in the Victorian conviction that measurement is indispensable in interpreting human behavior. The theory focuses on decision-making, but bears little resemblance to the many other theories that originated in games of chance.

Despite its nineteenth-century forebears, game theory represents a dramatic break from earlier efforts to incorporate mathematical inevitability into decision-making. In the utility theories of both Daniel Bernoulli and Jevons, the individual makes choices ...