Investor Knowledge
August 06 2025

Uncertainty, Unplugged: Investing When the Data Goes Dark

5 min read

Jeff Evans, CFA, Vice President & Director, Lead of Empirical Research & PM Support, TD Asset Management Inc.

Risk is everywhere in investing — that much is obvious. What’s less obvious is that not all risk is created equal. Nearly a century ago, economist Frank Knight made a crucial distinction that’s still reshaping how smart investors think today: the difference between risk and uncertainty.

In his view, risk is something we can measure. It’s the kind of probability we can calculate, like the odds of a company missing earnings or a bond defaulting. But uncertainty? That’s something entirely different. Knightian Uncertainty is about the unknown unknowns — the future events we can’t predict, quantify, or even imagine.

Understanding this difference isn’t just an academic exercise. It has major implications for how we invest, especially in times of volatility, disruption, or rapid change. Here’s why embracing, not ignoring Knightian Uncertainty could be a valuable contemplation when looking at investment portfolios.

  • Risk vs. Uncertainty: What’s the Difference?

    Risk is quantifiable. We can assign probabilities to it. Think of weather forecasts, insurance premiums, or the volatility baked into option prices. Financial markets are filled with tools to manage risk – think diversification, hedging, and statistical models. Knightian Uncertainty, on the other hand, is not measurable. It includes things like unexpected regulatory shifts, paradigm-changing technology, pandemics, or social movements. These events can’t be predicted with a neat bell curve. They are beyond the scope of models, but not beyond reality.

If the Global Financial Crisis and the COVID-19 Pandemic taught us anything, it’s that the most impactful events in markets are often those no spreadsheet could see coming.

 

So How Do You Invest in the Face of Uncertainty?

Accept that models have limits - Relying solely on historical data or quantitative risk models can give a false sense of control. Markets don’t repeat, they rhyme, and sometimes they surprise.

Prioritize resilience over optimization - Portfolios built for a narrow range of scenarios can break when faced with true uncertainty. Instead of chasing the highest possible return, consider how your portfolio will respond across a wide range of unknown outcomes. This might mean holding more cash, owning uncorrelated assets, or reducing leverage.

Diversify by worldview, not just asset class - Traditional diversification (stocks, bonds, etc.) is necessary but not sufficient. Knightian Uncertainty calls for conceptual diversification, exposure to investments that respond to different visions of the future (e.g., green energy vs. fossil fuels, developed markets vs. emerging ones, centralized vs. decentralized systems).

Favour simplicity - In uncertain conditions, complex strategies often fail because they rely on fragile assumptions. A broadly diversified, low-cost, long-term strategy often proves more robust when the unpredictable happens.

Stay humble and flexible - The best investors don’t pretend to know the future. Instead, they build systems that adapt to it. Rebalancing regularly, reassessing goals, and being willing to shift your strategy as new information emerges are all part of managing uncertainty.

 

Why This Matters Now More Than Ever

Today’s world is thick with Knightian Uncertainty: AI is reshaping work, climate events are escalating, global politics are shifting, and financial norms are being challenged by everything from crypto to central bank digital currencies.

In such an environment, investors who seek comfort in precision are often caught off guard. Those who accept uncertainty, and plan for it, are better positioned not only to withstand shocks, but also to take advantage of them.

 

The Bottom Line: Embrace the Unknowable

You can’t model everything. But you can prepare for anything.

Knightian Uncertainty reminds us that investing isn’t just about crunching numbers, it’s about acknowledging the limits of what we know and building portfolios with the potential to be strong enough to handle what we don’t. So instead of fearing the unpredictable, start factoring it in. The future may be uncertain, but your strategy doesn’t have to be.

For institutional investment professionals only. Not for further distribution.

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