Wednesday 18 June 2008

Kling on Caplan

Arnold Kling attempts to answer Bryan Caplan's challenge. Kling writes
Let me attempt an answer. I would say that "don't know that you don't know" corresponds to an event for which there is no traded contingent claim. The neoclassical world is one in which there are contingent claims for every meaningful event.

If there is an insurance contract, a security, or a futures market on something, then we know what we don't know. We don't know whether the event will occur, but we know what the market thinks about it.

When there is an event for which there is no traded contingent claim, then we don't know what we don't know. We don't know what we don't know about climate change or a future terrorist attack, and the evidence for that is the lack of any contingent claims market that could be used to draw inferences about climate change.

2 comments:

Matt Burgess said...

Would seaside real estate count as a contingent claims market from which one could draw inferences about climate change?

Paul Walker said...

Not a bad idea. Only problem would be sorting out the climate effects from the other effects on the price of real estate but I guess it could be done.