Frank Hyneman Knight, 1885-1972 was an American economist and Professor at Cornwell University, the University of Iowa, and the University of Chicago, where he is considered as one of the founding fathers of the Chicago School. Knight is considered one of the greatest contributors to the economic science. In his most important work, “Risk, Uncertainty and Profit”, 1921, Knight makes the distinction between risk and uncertainty and their relation with profit.
He described risk as having an unknown outcome, but from which a reliable estimate of its possibilities can be calculated, and where a maximising expected utility can be applied for decision making.
Uncertainty is characterized by an unknown outcome and from which no reliable estimates can be made for its different possibilities, which explains why it’s usually analysed in game theory. The difference, therefore, is subject to outcome probability calculation. Knight defines uncertainty as the true explanation for profit and where the entrepreneur’s role is to foresee the future, and thus paying in advance for factors of production, in order to achieve a future profit.