Risk will be forever, inextricably linked to uncertainty.Īs we all know, certainty is elusive. It wouldn’t be risk because it would be predictable. If we knew, without a doubt, that something bad was about to occur, we would call it apprehension or dread. The person or corporation occupying the mortgage-funded property must purchase insurance on real estate if we intend to lend them money. For example, uncertainty causes mortgage issuers to demand property purchase insurance. We simply need to avoid certain business activities or involvements that we consider too risky. Uncertainty causes us to take precautions. Gambling and participation in extreme sports provide examples. Uncertainty causes the emotional (or physical) anxiety or excitement felt in uncertain volatile situations. Nonperfect predictability arises in uncertain situations. We may experience no doubt in certain situations. We provide here a simple definition of uncertainty: Uncertainty is having two potential outcomes for an event or situation.Ĭertainty refers to knowing something will happen or won’t happen. In all cases, however, the notion of risk is inextricably linked to the notion of uncertainty Having two potential outcomes for an event or situation. Further, the word takes many different interpretations in these varied contexts. The word “risk” is used in many different contexts. Thus, actually giving a single unambiguous definition of what we mean by the notion of “risk” proves to be somewhat difficult. We have all felt the excitement, anticipation, or anxiety of facing a new and uncertain event (the “tingling” aspect of risk taking). We all have a personal intuition about what we mean by the term “risk.” We all use and interpret the word daily. We will discuss possible interpretations in what follows. Thus, professionals try to use different words to delineate each of these different interpretations. One might use any of the previous interpretations. For example, what does a businessperson mean when he or she says, “This project should be rejected since it is too risky”? Does it mean that the amount of loss is too high or that the expected value of the loss is high? Is the expected profit on the project too small to justify the consequent risk exposure and the potential losses that might ensue? The reality is that the term “risk” (as used in the English language) is ambiguous in this regard.
Because of risk’s all-pervasive presence in our daily lives, you might be surprised that the word “risk” is hard to pin down. We must evaluate solutions to problems (global, political, financial, and individual) on a risk-cost, cost-benefit basis rather than on an absolute basis.
We must evaluate profit opportunities in business and in personal terms in terms of the countervailing risks they engender. Indeed, risk, and how it is managed, are critical aspects of decision making at all levels. The notion of “risk” and its ramifications permeate decision-making processes in each individual’s life and business outcomes and of society itself. You will build the definition of risk as a consequence of uncertainty and within a continuum of decision-making roles.In this section, you will learn the concept of risk and differentiate between risk and uncertainty.
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