All businesses face risk and uncertainty, from local corner shops to major blue-chip PLCs. After reading this article you will learn about Decision-Making under Certainty, Risk and Uncertainty. Uncertainty and risk are closely related concepts in economics and the stock market. Decision-making under Certainty: . An example of risk is rolling a pair of dice. Risk and Uncertainty The concept of (fundamental) uncertainty was introduced in economics by Keynes (1921, 1936 and 1937) and Knight (1921). A key characteristic in corporate finance is managing those risks and uncertainties. Uncertainty masquerades as risk in many investors’ minds, which creates mispricing opportunities. For example, the collapse of the economy in 2008. As an investor, I try to run away from risk, and toward uncertainty… The definitions of risk and uncertainty were established by Frank H. Knight in his 1921 book, "Risk, Uncertainty, and Profit," where he defines risk as a measurable probability involving future events, and he argues that risk will not generate profit. A good example is that you need to decide when to leave home to pick up someone from the airport. Some risks and uncertainties feature more prominently in some businesses than others. new supplier, new process, (especially) new technology etc. Shop owners are increasingly facing this missing piece of uncertainty: the unknown unknowns. Good examples of real project risks: Genuine projects always carry risk – i.e. You figure you will give yourself an extra 10 to 20 minutes more, depending on the time of day, traffic, weather, etc., so you will not “risk” missing your pickup. Table 1 shows the steps needed to get at the final answer. A condition of certainty exists when the decision-maker knows with reasonable certainty what the alternatives are, what conditions are associated with each alternative, and the outcome of each alternative. risk is the statement of what may arise from that lack of knowledge" (Cleden, 2009, p5), a view shared in turn by Ward & Chapman (2003) and Loch et al. (2006) who contend that underlying uncertainties are the source of all risk. For example, a local dry-cleaner is highly unlikely to suffer a significant amount of risk from changes […] Knight calls this type of uncertainty risk. In case of risk all possible future events or consequences of an action or decision are known. the uncertainty in the CER (+22.1%, – 18.1%). Let’s take a look at the differences between certainty, risk and uncertainty, and how we can respond. In this example, the estimated cost would range from $30.8K to $48.6K after considering both uncertainty and risk. They felt a distinction should be made between risk and uncertainty. For example, an uncertainty in major infrastructure projects is the financial To that I would say that said people make the common mistake of confusing uncertainty with risk. The example given on the Freakonomics podcast to help underline the difference between risk and uncertainty was as follows: Suppose you have a jar with 50 red and 50 black marbles inside and you are asked to reach in and grab a red marble while blindfolded. Risk vs. uncertainty If you're using the terms loosely, you might conflate the ideas of "risk" and "uncertainty" -- since both relate to an engagement with an unknown potential outcome. Given that Novo has cash and a fully permitted, high grade, open pittable deposit in Beaton’s Creek I would argue that the market is not pricing in much more than say a good margin 1.5 moz deposit in the best jurisdiction on the planet (WA)… uncertainty. On average, it takes you, say 40 minutes, to drive to the airport. Probably the biggest indicator of the likelihood of risk is whenever you hear the word “new”, i.e.