The Folly of Fully
IN MODERN ECONOMIES, individuals and companies engage in innovative activities, discovering new ways to use existing physical and human capital, and new technologies in which to invest. The institutional and broader social context within which this entrepreneurial activity takes place also changes in novel ways. And innovation itself influences the future returns from economic activity in ways that no one can fully foresee. Thus, change in capitalist economies is to a significant extent nonroutine, for it cannot be adequately captured in advance with mechanical rules and procedures.
Because nonroutine activities are an important component of change, investment decisions in modern economies are themselves inherently nonroutine. In the vast majority of cases, the prospects of investment projects—the stream of future returns —cannot be understood in standard probabilistic terms.1 It is impossible to know all potential outcomes, let alone the probabilities with which they might occur.
This is obviously true for investments in innovative products and processes for which estimates of returns cannot be based
1Frydman and Goldberg (2007, chapter 3) propose a way to use probabilistic descriptions in the context of mathematical models that do not assume away nonroutine change.