It's important to distinguish risk from uncertainty

Published in The Sunday Times on 29th March 2026.

Will Jesus Christ return before 2027? If you have a view you can bet on it through Polymarket - a decentralised, prediction market platform where people trade on the outcomes of future events.  

There is market price for each event and it reflects the crowd implied probability of the outcome, which for Christ returning before 2027 is 4%.

Markets can attach a number to anything, but the number doesn’t change the true nature of an event like this. A theological event without precedent — sits outside the domain of what can be measured. There is no model, no history, no distribution.  

In financial markets, this is often referred to as Knightian uncertainty. Named after the economist Frank Knight, who first distinguished measurable “risk” from unmeasurable “uncertainty”. It is the kind of uncertainty where you can’t even know—or meaningfully estimate—the probabilities of future outcomes, because the underlying possibilities themselves are unknowable.

Rolling dice – is what we would describe as a traditional ‘risk’ event. I don’t know what numbers I will roll, but I know what the probabilities are. 

Uncertainty is something different all together. It would be like asking, what are chances that AI leads to human extinction? We’ve never built an intelligent nonhuman agent before, so we don’t even know the shape of the game, let alone the odds. This is akin to what Donald Rumsfeld might refer to as things we don’t know, we don’t know. 

Financial history is replete with events that in hindsight could be described as being Knightian uncertain: The invention of the internet, the emergence of bitcoin, and the early days of Covid.  

A current event that doesn’t fall into this category is the war in Iran and the Middle East. I don’t know how it is going to end, but geopolitical shocks remain within a familiar and modellable structure — energy chokepoints, inflationary pressures and economic growth impacts.  

Financial markets mix risk and uncertainty. You can’t eliminate uncertainty — it’s a structural part of markets. The point of distinguishing risk from uncertainty isn’t philosophical — it’s practical. I think investors very often misunderstand risk and where returns come from. Risk can be modelled, uncertainty can’t. As a stock market investor you are forced to live with both. But you are being paid to endure it.

The difference between the long run return on equities and the return on a risk-free asset (typically government bonds) is referred to as the equity risk premium. 

According to the UBS Global Investment Returns Yearbook 2026, US equities have delivered about 6.6% real returns since 1900 versus 1.6% for bonds — a 5% real equity risk premium. This was sustained across 125 years of geopolitical shocks, technological revolutions, and deep uncertainty.

An ongoing debate in financial markets - called the equity premium puzzle - concerns the size of this premium – that it’s too large to be easily explained by risk aversion. But you aren’t just being compensated for volatility. You are being compensated for bearing uncertainty many people find intolerable. 

So much of the financial market commentary we read or listen to is describing current trends. Knowing where these trends will lead — forecasting turning points or future states — is something which well-known investor, Howard Marks, repeatedly warns is unknowable.

It is still important to understand market cycles – but the real investment edge is the appreciation that as a stock market investor, you own a slice of the future that we just can’t model. If you truly understand this, you are inoculated against the illusion that risk can always be perfectly priced or that past patterns will always map to future outcomes. Intellectual humility of this sort I have found to be rare. 

Many investors think returns come from timing, forecasts and finding the next big theme or picking stocks. A common request over the last six months or so has seen many investors chasing returns in areas like aerospace & defence stocks or in precious metals. This pattern is not new — it's predictable, and already priced behaviour. It doesn’t mean you won’t make money investing in these sectors – but this approach is unlikely to provide consistent returns.

In a world defined by technological upheaval, geopolitical tension, and shifting regimes, the lesson from more than a century of data is simple: embrace uncertainty, stay diversified, hold risk assets, and let the premium do its work.

Investing is a serious business. If this lacks enough excitement, Polymarket is offering odds on whether or not the second coming of Jesus Christ occurs before Grand Theft Auto VI is officially released in the US. There is plenty of itch to scratch there.   

Source: Data is sourced from Bloomberg as at market close 31st December, returns are based on total indices in local currency terms, unless otherwise stated.

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on X at @gconno1.