What is the difference between risk and uncertainty? Provide examples of what your organization has done, or not done, to deal with risk and uncertainty. How did those actions affect the firm once a contingency of risk or uncertainty materialized?
Sep 16, 2023, 10:27 PM
Before diving into the difference between risk and uncertainty, it is imperative to understand the meanings of each. Risk in economics occurs “… when future events occur with the measurable probability” and Uncertainty occurs “… when the likelihood of future events is indefinite or incalculable” (Rose, 2001). These are defined due to various aspects of how they apply to the analysis of profit and the origin of the profit. Risk can be quantified and is very much measurable, however, uncertainty is not measurable or quantifiable. Individuals and firms can mitigate risk by planning and making analysis-based assumptions of the risk into a certainty. This allows for a firm to determine a back-up plan if the risk were to take place. On the other hand, uncertainty comes from various inconsistent circumstances or situations that cannot be analyzed. These circumstances are very unique, which is not to say that they are not thought of, however, it is very unlikely that these situations will happen.
Before kicking-off a huge project, my organization requires risk assessments to be done. We use previously created projects that are similar in structure. Most of the assessment pertains to cost-benefit and resource allocation. Once the assessment has been put together, we meet with stakeholders for them to understand the risks and how they can be mitigated or how we can work with the risk to complete the project. With uncertainty, it is difficult to know when it will happen, but before starting a project we give more time in the timeline, provide higher resource allocations and financial backing than may be needed.
Rose, M. (2001, November 5). Risk versus Uncertainty, or Mr. Slate versus Great-Aunt Matilda. Econlib. https://www.econlib.org/library/Columns/Teachers/riskuncertainty.html
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