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Risk and Uncertainty

Chapter
Part of the Quantitative Perspectives on Behavioral Economics and Finance book series (QPBEF)

Abstract

Although beta’s cash-flow and discount-rate components are conceptually distinct, the empirical boundary between cash-flow beta and discount-rate beta is far from clear-cut. To facilitate the interpretation of these components of systematic risk, this chapter introduces the distinction between epistemic risk and aleatory uncertainty. This conceptual dichotomy originates in economic work by Frank Knight and John Maynard Keynes and reflects principles of uncertainty in physics. It prominently in evaluations of cash-flow and discount-rate information. A special case of uncertainty, information uncertainty, is readily adapted for the interpretation of economic data that has ambiguous implications for individual firms, capital markets, and the broader economy. Although information uncertainty is compatible with behavioral interpretations of investor reactions to ambiguity, it is equally consistent with theories of rational learning.

Copyright information

© The Author(s) 2017

Authors and Affiliations

  1. 1.College of LawMichigan State UniversityEast LansingUSA

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