Difference between Risk and Uncertainty

Key difference: Risk is essentially the level of possibility that an action or activity will lead to lead to a loss or to an undesired outcome. The risk may even pay off and not lead to a loss, it may lead to a gain. Uncertainty, on the other hand, is unpredictable. It has too many unknown variables which do not even allow one to estimate as to what is going to happen.

Risk is essentially the level of possibility that an action or activity will lead to lead to a loss or to an undesired outcome. The risk may even pay off and not lead to a loss, it may lead to a gain.

Dictionary.com defines risk as:

  • Exposure to the chance of injury or loss; a hazard or dangerous chance: It's not worth the risk.
  • The hazard or chance of loss.
  • The degree of probability of such loss.
  • The amount that the insurance company may lose.
  • A person or thing with reference to the hazard involved in insuring him, her, or it.
  • The type of loss, as life, fire, marine disaster, or earthquake, against which an insurance policy is drawn.

There are many difference kinds of risk. Wikipedia lists six different ways that risk can be defined:

 
  • A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.
  • Finance: The probability that an actual return on an investment will be lower than the expected return.
  • Food industry: The possibility that due to a certain hazard in food there will be an negative effect to a certain magnitude.
  • Insurance: A situation where the probability of a variable (such as burning down of a building) is known but when a mode of occurrence or the actual value of the occurrence (whether the fire will occur at a particular property) is not.
  • Securities trading: The probability of a loss or drop in value.
  • Workplace: Product of the consequence and probability of a hazardous event or phenomenon.

Uncertainty, on the other hand, is unpredictable. It has too many unknown variables which do not even allow one to estimate as to what is going to happen.

Dictionary.com defines uncertainty as:

  • The state of being uncertain; doubt; hesitancy: His uncertainty gave impetus to his inquiry.
  • An instance of uncertainty, doubt, etc.
  • Unpredictability; indeterminacy; indefiniteness.

As compared to risk, uncertainty is much more volatile. It does not allow one to see what or how something might affect them. Whereas, risk is something that can be predicted; it is the possibly of something happening. One can anticipate the outcome or a loss from the risk, and hence effectively prepare for it; whether to minimize the loss or to recover from the loss from a risk.

Image Courtesy: advancehe.com, mises.org

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Comments

its good and clear to the point

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