Risk vs Uncertainty --- Business Perspective

 

Risk vs Uncertainty

Risk and uncertainty are two similar words that are being used interchangeably since long in our day to day life. But what is the difference between them? Are these two words different from each other or they are different words with the same meaning? Don't worry! These questions which have been puzzling and confusing people are going to be answered here.  And you will no longer be baffled in their appropriate usage. The only similarity between them is that these words refer to an experience in the future but they are different in their interpretation. You might have come across these terms in your Project Management, Finance, Economics or even in your Health classes but you were not sure about the difference and that is what brought you here!! So let’s see in detail how they are different from each other and how they can be used properly. 

Definitions

Risk

Let’s look into the meaning of risk and look at all of its possible usages. According to the Oxford Dictionary, a risk is defined as a situation that has a possibility of resulting in danger or ending up in some unfavourable results. Risks are the ‘known unknowns’. This means that one knows in advance about the possible unpleasant outcomes that can result from an event or situation so he plans accordingly. Suppose you are starting a new project that is construction related. It has numerous risks associated with it for example, Technology not easily available, resources not committed to the project, sponsors do not show up for the meeting, unidentified end resources. Risks are identified, described and analysed in terms of: -

• The probability that they will occur
• Impacts or consequences if they occur
• Time Frame within which their consequences might occur

 

On a broader scale, risks can be divided into three categories: -

1. Business Risk:

Business always involves some level of risk in it and business enterprises have to take these kinds of risks to enhance their profits and shareholder values. These are the statistically calculated risks which any business company must have to take. It might result in a lower than expected profit or severe loss. For example, an investment is made in a company that makes guitars only for girls. There is a high business risk associated with it, whether this investment will tend to produce the desired profit or not because not all of the guitar buyers are girls.

 

2. Non-Business Risk:

These types of risks are not directly associated with any company and are not under the control of anyone. They might occur due to political or social imbalances. For example, in an organization, there is a constant risk of fire, destruction by Earthquake, flood, theft, equipment failure, loss of a good employee and other accidents that one has not predicted and planned for.

 

3. Financial Risk:

Financial risk can be rated as a high-priority risk for any business. If the risk occurs, then this could mean a complete financial loss for the investors. It occurs due to changes in costs of financial instruments, when an investor fails to satisfy their counterparties, or due to insufficient buyers or sellers.

 

Uncertainty

In the previous section, we had a thorough regarding what risk is. Now let’s move on to uncertainty and explore its meaning in depth. According to the Oxford Dictionary, uncertainty is described as the situation that causes one to feel unsure about the outcomes whether they will be as desired or not. It always involves doubt in it. One doesn’t have an idea about what can be the possible results and it is almost impossible to forecast them either. These are described as the unknown unknowns. For example, in wars, none of the two opposing teams are certain about who is going to win. No statistics can be involved to determine the winning party or in who’s favour the tables will turn.

 

Key Difference between Risk and Uncertainty

After having a comprehensive look at the meanings of both risk and uncertainty, the two terms can be differentiated on the following grounds: -

 

⮚        The risks are known in advance whereas there is no knowledge about uncertainty beforehand.

⮚        Risks are identified using quantitative analysis employing different theoretical models while no such technique or model is available to determine the uncertainty in an event.

 

⮚        Steps can be taken to minimize the risks but uncertainties can not be eliminated.

 

⮚        In risk, the possible results are known. Conversely, in uncertainty, the output of a certain event is unknown.

 

⮚        Probability is associated with risks for example, in gambling, the gambler knows that the probability of occurrence of a six is 1/6. But no such probability can be calculated for uncertainty.

 

Risk vs. Uncertainty – Tabular Comparison

 

	Risk	Uncertainty
Meaning	A situation having the possibility of resulting in a loss that is known in advance.	A situation that has an outcome that is not known.
Identification	Can be measured	Can not be measured
Results	Known in advance	Unknown
Control	Can be controlled	Can not be controlled
Probability	Can be calculated	Can not be calculated
Minimization	Can be minimized	Can not be minimized