Practical analysis for investment professionals
21 May 2013

Nobel Prize Winner Thomas Sargent on Risk, Ambiguity, and Investment Decision Making

Posted In: Risk Management

Delegates at the 66th CFA Institute Annual Conference in Singapore were treated to a discourse on rational expectations and ambiguity from Nobel Prize winner Thomas Sargent, the William R. Berkley Professor of Economics and Business at the New York University Stern School of Business.

Investment decision making is challenging because it involves both risk and ambiguity, argued Sargent, who earned his Nobel Prize in economics in 2011 for his research on cause and effect in the macroeconomy. By risk, he means uncertainty about the future. By ambiguity, he means ignorance about the appropriate probability distribution or appropriate model. Professor Sargent contends that many financial models fail to distinguish between the two concepts and, consequently, that investors often mistake ambiguity premiums for risk premiums.

Historically, decision makers of all types have used rational expectations as a basic underlying assumption of their economic and financial models. While it has been a useful tool and was a significant leap forward, it is nevertheless an incomplete model. Sargent’s work is pioneering the way in articulating and separating the various components of risk.

Read more on the 66th CFA Institute Annual Conference blog

About the Author(s)
Ron Rimkus, CFA

Ron Rimkus, CFA, was Director of Economics & Alternative Assets at CFA Institute, where he wrote about economics, monetary policy, currencies, global macro, behavioral finance, fixed income and alternative investments, such as gold and bitcoin (among other things). Previously, he served as SVP and Director of Large-cap Equity Products for BB&T Asset Management, where he led a team of research analysts, 300 regional portfolio managers, client service specialists, and marketing staff. He also served as a Senior Vice President and Lead Portfolio Manager of large-cap equity products at Mesirow Financial. Rimkus earned a BA degree in economics from Brown University and his MBA from the Anderson School of Management at UCLA. Topical Expertise: Alternative Investments · Economics

1 thought on “Nobel Prize Winner Thomas Sargent on Risk, Ambiguity, and Investment Decision Making”

  1. Per Kurowski says:

    Oh so that means that there are absolutely faultless risks models which can be used to calculate non-ambiguous risk premiums. Well that is something new. No wonder he won a Nobel Prize.

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