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Risk
Definitions of riskHistorical backgroundRisk vs. uncertaintyInsurance and health riskInsightIn businessRisk sensitive industriesIn public worksRegretFramingFear as intuitive risk assessmentRisk assessment and management
Definitions of riskHistorical backgroundRisk vs. uncertaintyInsurance and health riskInsightIn businessRisk sensitive industriesIn public worksRegretFramingFear as intuitive risk assessmentRisk assessment and management
Risk vs. uncertainty
In his seminal work ''Risk, Uncertainty, and Profit'', Frank Knight (1921) established the distinction between risk and uncertainty.A solution to this ambiguity is proposed in "How to Measure Anything:Finding the Value of Intangibles in Business" by Doug Hubbard
::'''Uncertainty''': The lack of complete certainty, that is, the existence of more than one possibility. The "true" outcome/state/result/value is not known.
::'''Measurement of Uncertainty''': A set of probabilities assigned to a set of possibilities. Example: "There is a 60% chance this market will double in five years"
::'''Risk''': A state of uncertainty where some of the possibilities involve a loss, catastrophe, or other undesirable outcome
::'''Measurement of Risk''': A set of possibilities each with quantified probabilities and quantified losses. Example: "There is a 40% chance the proposed oil well will be dry with a loss of $12 million in exploratory drilling costs".
In this sense, Hubbard uses the terms so that one may have uncertainty without risk but not risk without uncertainty. We can be uncertain about the winner of a contest, but unless we have some personal stake in it, we have no risk. If we bet money on the outcome of the contest, then we have a risk. In both cases there are more than one outcome. The measure of uncertainty refers only to the probabilities assigned to outcomes, while the measure of risk requires both probabilities for outcomes and losses quantified for outcomes.