ABSTRACT
This chapter establishes the conceptual framework for analysing systemic risk by distinguishing it from systemic uncertainty and examining their implications for financial stability. The discussion begins with Knight's foundational distinction between risk and uncertainty and considers its modern reinterpretations, particularly in relation to information imperfections observed during the 2008–2009 financial crisis. The chapter then introduces Bewley's Knightian decision theory, highlighting the role of decision inertia and incomplete probability assessments in economic behaviour. It also revisits the treatment of uncertainty within the Arrow–Debreu general equilibrium framework. Building on these foundations, the chapter analyses the spatial and temporal dimensions of systemic risk and contrasts exogenous and endogenous perspectives. Finally, it reviews key approaches to measuring and modelling systemic risk, comparing mainstream methods with heterodox frameworks.
