Beyond Risk: Voluntary Disclosure Under Ambiguity

Ambiguity, also known as Knightian uncertainty, is rooted in nearly every real-life decision process. It refers to situations in which both the outcome and the probabilities governing the set of possible outcomes are unknown. Risk, on the other hand, refers to situations where the future outcome is unknown, but the set of possible outcomes is […]

Beyond Risk: Voluntary Disclosure Under Ambiguity
Posted by Ariel Rava (Harvard Law School), on Monday, June 24, 2024
Editor's Note:

Ariel Rava is a Post-Doctoral Fellow at Harvard Law School’s Program on Corporate Governance. This post is based on his recent article.

Ambiguity, also known as Knightian uncertainty, is rooted in nearly every real-life decision process. It refers to situations in which both the outcome and the probabilities governing the set of possible outcomes are unknown. Risk, on the other hand, refers to situations where the future outcome is unknown, but the set of possible outcomes is known, with certain probabilities attached to them. To illustrate, if I toss a coin, I know that it will land with heads or tails, but I do not know which side it will land on until after the toss. If I know the probabilities are 0.5 and 0.5, then I face risk. If I do not know what the probability of heads or tails is (the coin may be fair or unfair), then I face ambiguity. Thus, the key distinction between risk and ambiguity is whether the probability distributions associated with the possible outcomes are known or unknown.

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