The main difference between risk and uncertainty is that the risk is measurable while the uncertainty is not measurable or predictable.
Risk and uncertainty are two important terms in finance and business. While some tend to use these two terms interchangeably, there is a distinct difference between risk and uncertainty. Risk is the probability that the actual result of an investment will differ from the expected result, while uncertainty is the lack of certainty about an event.
Key areas covered
Risk, systematic risk, uncertainty, unsystematic risk
What is risk
Risk is basically the possibility that something bad will happen. In business and finance, the risk is the possibility that the actual outcome of an investment will differ from the expected outcome. Risks can include the possibility of losing all or part of the original investment in a company. However, to some extent the risk can be calculated using historical data and market factors. It is also important to note that the higher the risk an investor is willing to take, the higher the retained return. No investment is free from risk, but some investments have lower practical risks than others.
There are two main types of financial risk; there are systematic risks and unsystematic risks. Systematic risks can affect the entire economic market or a larger part of the market. This includes the interest rate risk, the inflation risk , the socio-political risk and the currency risk. Unsystematic risks, on the other hand, are a type of risk that only affects a specific company or industry. This could be due to a change in management, new competitors in the market, regulatory changes affecting sales, a product recall, etc.
What is uncertainty?
Uncertainty is basically a lack of certainty about an event. In finance and business, uncertainty means that outcomes or consequences cannot be predicted due to a lack of knowledge or data, making it impossible to predict. There can be several possible outcomes, but the possible outcomes are also not certain. The COVID-19 pandemic situation is an example of making decisions under uncertainty. When the pandemic first broke out there was a lot of uncertainty - we didn't know how to protect ourselves, get on with our daily lives, etc.
Uncertainty differs from risk in that the risk can be measured and quantified in advance from historical data. Therefore, the risk is easier to manage, especially if we take the right measures. We can insure risks, but not uncertainties.
Difference between risk and uncertainty
Risk is the probability that the actual result of an investment will differ from the expected result, while uncertainty is the lack of certainty about an event.
If there is a risk, potential results are known; if there is uncertainty, the potential results are unknown.
Risks can be measured and quantified using theoretical models, but uncertainty cannot.
In addition, risks can be controlled if appropriate measures are taken at the right time; however, the uncertainty is out of control.
Risk is the probability that the actual result of an investment will differ from the expected result, while uncertainty is the lack of certainty about an event. The main difference between risk and uncertainty is that the risk is measurable while the uncertainty is not measurable or predictable.
1. Chen, James. " Risk ". Investopedia. 2. “ Uncertainty - Definition, Example and Role in Investing .” Institute for Corporate Finance.