Risk vs Uncertainty: Difference and Comparison

As we live our daily lives, risk and uncertainty are issues we face rather often, and risk is measurable and gets minimized by taking preventive steps. Uncertainty is a situation which crips up from an unknown source.

Our Businesses are all concerned with risk-taking and coping with uncertainties and disturbances, as quoted by Gautam Adani.

Key Takeaways

1. Risk encompasses situations with known probabilities, allowing for better decision-making and planning.
2. Uncertainty involves situations where probabilities cannot be determined, making predictions and planning more challenging.
3. Risk management techniques help businesses navigate risks, while uncertainty requires flexibility and adaptability.

Risk vs Uncertainty

Risk refers to a situation where the probability of an outcome can be estimated, and the potential consequences of that outcome are known. Uncertainty refers to a situation where the probability of an outcome cannot be estimated, and the potential consequences of that outcome are unknown.

Risk is something worst happening either in business or personal lives. To some extent, the risk calculation is possible, and the necessary precautions can be taken. The outcome of risk is unknown.

It gets minimized and controlled based on calculated risk. Every saying or investment generates some amount of risk.

Uncertainty means a lack of sureness in an event. The inability to predictions or knowledge leads to uncertainty. It gets beyond one’s control and considerably affects the company or an individual.

Uncertainty comes from an unknown source or probability. A sudden change in a government policy could be an example of uncertainty, as the outcomes are highly unpredictable.

Comparison Table

Parameters of Comparison	Risk	Uncertainty
Meaning	It is a loss based on assumption.	It is a condition without any knowledge.
Calculation	It can be quantified through various options and ways.	It can be quantified.
Outcome	The outcome of it is known.	The outcome of it is unknown.
Affect	The effect is minimized by good effective measures.	As it is unknown nothing much can be done.
Control	Proper measures can reduce it.	It is beyond our control.

What is Risk?

Risk is the possibility of something unpleasant or uncertain happening based on the expected outcome. In finance, a risk implies the result differs from the expectation. Risk is measured based on specific calculations.

The risk factor is controlled to an extent if proper measures get taken. 

Basics of Risk:

The risk gets exposed to everyone and becomes part of our lives. Driving the vehicle, unnatural calamities, and investments going wrong are all part of a risk.

The planning and execution may reduce the extent, but the risk is inevitable.

In investment, an investor expects a higher return with greater risk. The extent of risk to be taken depends on the investor’s lifestyle, age, and personality.

There is an elementary connection between risk and returns. The greater the amount of risk taken, the higher the returns. The risk factors come in various forms based on the investment.

A Treasure fund is the safest as compared to a corporate bond. But the corporate bond investment is risky, and the returns are higher.

Types of Financial Risk:

Every investment or saving involves different risks. The classifications are systematic risk and unsystematic risk:

• Systematic Risk-The market risk termed systematic risk affects the entire economy. The loss of investment occurs due to sizeable issues like politics or macroeconomics, which affect the economy. Diversification does not avoid systematic risk.
• Unsystematic Risk-It is a risk that affects a specific industry or sector. Change in management, crucial regulation, or a new competitor could be a few reasons for the likelihood.

A diversified portfolio consisting of a blend of various securities and bonds could minimize the risk factor. Regular updates of the market and in-depth analysis will enhance the consistency of returns.

We need to realize that risk is part of our everyday lives.

What is Uncertainty?

Uncertainty refers to not being sure or prepared for any results or outcome. It implies a lack of knowledge or a base to forecast.

Uncertainty and Investing:

The term uncertainty must be taken into consideration by owners and investors by ensuring credible financial statements by experts. Utilizing accounting principles to compare the various records minimizes uncertainty. 

Uncertainty implies anything could happen at any given point in time. It leads to a theory to be prepared and how it is an advantage. 

• Forecasting is essential-Annual budgets may not give an insight into the micromanagement of the company. Structured planning and forecasting based on the planning are essential.
• Shift to automation-Manual data collation and analysis could be tedious and may lack authenticity. Business automation enhances work and effectiveness.
• Efficient reporting of finances-Automation leads to efficient and accurate financial reports.
• Self-service is a key-As individual stakeholder to the company. It is essential to evaluate the data of the company. Grasp the current situation and have an understanding of the future. It gives freedom to individuals and frees the IT team or other services to concentrate on the essential process.

Measuring uncertainty in a quantitative term gets strenuous. It is hard to define future events. Taking advantage of this term and preparing oneself is best in any situation.

Main Differences Between Risk and Uncertainty

1. Risk is the situation of losing something based on an expectation. Uncertainty is a situation without any knowledge of the future.
2. The term risk can be measured and quantified. The term uncertainty can’t get quantified as it has no models to measure it.
3. The outcome of risk is a known factor. The result of uncertainty is unknown.
4. The risk gets minimized by taking precautions. Uncertainty is unpreparedness, being ready to face a situation will make it easy.
5. Risk can get controlled with measures. Uncertainty is far from imagination.

References

1. https://www.journals.uchicago.edu/doi/abs/10.1086/261461
2. https://pubs.aeaweb.org/doi/pdf/10.1257/0002828041301551