Risk Vs Uncertainty

Risk vs. Uncertainty

Kim Mariani

Widener University

Risk vs. Uncertainty

        In this paper I will be discussing what the difference is between risk and uncertainty, examples and how it can effect decisions and how to deal with uncertainty. This topic interested me because its something not only managers should think about but the consumer as well. Its first important to know what risk is and what uncertainty is. Our book describes risk as being able to list possible outcomes and assign probabilities to each of those outcomes. Uncertainty refers to the outcomes that we cannot foresee, or the probabilities we cannot estimate (Froeb, McCann, Shor, and Ward 2010). When thinking about risk versus uncertainty risk is more related to the assets, quantified and pricing, where as uncertainty is not. Not understanding the difference between risk and uncertainty can be critical especially in decision-making and leading to being to confident.

        An easy example of risk is traveling. Say you are in charge to pick up a friend from the airport. You can put a time on that. The plane was to arrive at 6 pm and you know there is a risk of heavy traffic so it can cause you to be late. In that instance you can plan around time and factor in traffic so you can make it on time. As for uncertainty a good example today is the job market. You never know what can happen with the job market so the uncertainty of having a job one day and not the next. We can’t put a quantified or price on this because it is not an asset. The risk would be when deciding to apply for a job, looking at the company and seeing how the company is doing financially and if they had any history of financial downturns or lay offs.

        An example of risk versus uncertainty in a business and economical aspect is the stock market. Individuals can choose to invest in the stock market and take a risk with their investments. As for the risk side of the stock market, when an investor is deciding to invest in a company they can and should do their research of the company. They should look at their financial statements, analyze the return on equity, and past stockholder information. This is considered the risk part because we can quantify this and put prices on the investment. As for the uncertainty part the stock market is something that is heavily impacted by the environment and the economy. We can make decisions on risk but uncertainty we cant be sure if the stock market will increase or decrease.