Clearly pretending that uncertainty and risk are the same thing is bad - Keynes pointed this out ninety years ago now and lots of people have made that same point since then. Conceptually it's not hard to make that distinction, but it's harder to model - and "neoclassical" (for lack of a better term) models of behavior under uncertainty often come under criticism because they assume a probability distribution.
My question is this: Even in cases of fundamental uncertainty, people don't crawl into a hole, suck their thumbs, and whimper. They guess. Sometimes the guess is completely wrong - they don't consider the prospect of something, which is the same as assuming a zero percent probability of it when there is actually a non-negative probability. This is sort of an "unknown unknowns" situation. It's not even on their radar so they proceed as if it's not an option worth considering. My point is, what is there that's really lost if we model uncertainty as subjective probability that is wrong?
One potential problem is that I can assess something that is uncertain with a vague guess of 50% likelihood, and I can assess something that has a very well known probability distribution with a sure expectation of 50%. Presumably we don't want to treat those two as the same if I know that I am less sure about the former than the latter.
Just thinking out loud here. I think a lot of problems that come up - like Keynesian uncertainty - drive people to throw up their hands and toss out neoclassicism. It seems to me that if what we're trying to understand is human behavior, then humans still behave as if there's a certain probability distrubtion attached to uncertain events - even if that's not the real distribution or if the real distribution can't be calculated.
UPDATE: And Knight, obviously. I told Jeff Friedman he had a moral obligation to all future generations to cite Keynes in addition to Knight in his recent article on uncertainty, so I suppose I ought to live by my own advice. I've got nothing whatsoever against Knight - I just have more in the front of my mind the application of Keynes's work on the subject to actual economics, so he usually comes to mind first.
Emanuel Derman FTW
3 minutes ago