5

What is the difference between "risk" and "uncertainty"? In what situation should I use each word?

Improve this question
1
  • 1
    Are you asking about these words in a financial or mathematical context? These words have a different denotation in these fields.
    – rajah9
    Jul 22, 2011 at 13:11

4 Answers 4

Reset to default
3

Risk and Uncertainty have a specialized meaning in the financial world.

The Wikipedia article on Risk has an extended quote from Risk, Uncertainty, and Profit by Frank Knight (1921). He implies that risk is sometimes mathematically quantifiable, but uncertainty is never quantifiable.

By Knight's reasoning, you would use risk when examining a stock's previous return to predict its future return. If a stock were volatile in the past, one might expect that it would be more volatile in the future and thus have a higher risk. If the price changes of a stock were small and predictable, then one might expect that the price changes would continue to be less volatile in the future and thus have a lower risk.

There is a mathematical concept called expected value that can be used to quantify the risk. It may be based on a probability (such as a coin turning up heads 50% of the time). It may instead be based on statistics (using a concept of variance, which is related to standard deviation). Financial risk is based on expected value, and is quantifiable.

In contrast, by Knight's reasoning, uncertainty would not be quantifiable. The returns of both the volatile and the steady stock in the future are neither knowable nor quantifiable, so the returns are uncertain.

The face that turns up on a die before it is cast is unknowable and therefore uncertain. The probability that it will turn up a 1, 2, or 3 is quantifiable (it will happen in half the cases). So there is a known risk in casting the die and winning $10 if it turns up 1, 2, or 3 while losing $10 if it turns up 4, 5, or 6.

Improve this answer
1
  • Thank you very much for the meaning both in financial and mathematical context. The answer was very useful:)
    – user5323
    Jul 25, 2011 at 0:44
6

The difference can be described as follows:

Risk is concerned with the outcome of events, not necessarily dangerous. Uncertainty is concerned with its probability.

That is, if you're more concerned about the outcome associated with some event, you estimate its risk, but if you're interested in the probability of an event, you estimate its uncertainty, where uncertainty is the opposite of likelihood.

In risk assessment courses for industrial use, you learn to estimate risk and uncertainty independently. The risk from a fire may include loss of life, damage to property, interruption to production. The uncertainty is a numerical value which estimates its likelihood.

Improve this answer
4
  • Also, I believe risk is more concerned about the combination of the outcome and the probability (ie, outcome x probability).
    – rubergly
    Jul 22, 2011 at 7:42
  • Yes, that's just what we did in the Risk Assessment training.
    – pavium
    Jul 22, 2011 at 7:55
  • These are the technical definitions in Risk Assessment, but not necessarily the way the man in the street uses these words.
    – Peter Shor
    Jul 22, 2011 at 12:40
  • 1
    I think this is consistent with the man-on-the-street understanding. I am uncertain if today's temperature will get into 3 digits, but either way there is a risk of heatstroke.
    – Monica Cellio
    Jul 22, 2011 at 16:39
4

If you do something that is dangerous, there´s a risk you might get hurt.

If you do something that is safe but difficult to do, the outcome may be uncertain. (but it is not risky)

Try to learn to make computer programs in c++ programming language. Outcome is uncertain. Try to learn how to tame lions. That is risky!

It is uncertain if there is enough ice on planet Mars to make enough water and oxygen for a manned mission. It may be too risky for people go to planet Mars.

Hope that clears it up a bit.

EDIT: I stand corrected by the other answer. I went ahead to answer the question even though there was a bit of a risk my answer was going to be inaccurate. Yet of course there was no actual danger.

Improve this answer
3
  • 1
    I agree that risk usually implies hazard where uncertainty does not. For example in the cliché "no risk, no gain"
    – RedGrittyBrick
    Jul 22, 2011 at 9:23
  • +1: In common usage, risk generally means that you have something riding on the outcome (not necessarily connected with danger, you can risk $20 in a bet, which is in no way dangerous unless it's your taxi money home from a bad part of town), but uncertainty just means that you don't know what is going to happen.
    – Peter Shor
    Jul 22, 2011 at 12:36
  • It doesn't have to be physical danger, just a loss of some sort. What you risk on an inaccurate answer is a reputation for accuracy.
    – Karl Bielefeldt
    Jul 22, 2011 at 18:39
0

Risk is when we do not know what the outcome is, but we do know the distribution but uncertainty the outcomes, whereas uncertainty is when we do not know what the outcome, and we do not know the distribution.

The practical difference between the two categories, risk and uncertainty, is that in the former the distribution of the outcome in a group of instances is known (either through calculation a priori or from statistics of past experience), while in the case of uncertainty this is not true, the reason being in general that it is impossible to form a group of instances, because the situation dealt with is in a high degree unique.

Risk, Uncertainty and Profit, Frank H Knight, pub. Houghton Mifflin 1921

Improve this answer
1
  • 1
    Welcome to ELU.SE. I've found, formatted and cited the quote as it's still in copyright, but I feel your first sentence could be made clearer.
    – Andrew Leach ♦
    Nov 4, 2014 at 14:15

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.