Knowledge, Uncertainty, and Risk



Knowledge, Uncertainty, and Risk

Introduction

We are faced with decisions every day that we generally have to make them without any definite knowledge regarding the consequences. The amount of knowledge that we have posses about the decision that we have to make greatly influence our final choice. If we analyze the spectrum of knowledge, we will see that there are two extremes: perfect knowledge and uncertainty. This beckons the question where does risk lies in this broad spectrum. In order to address this question, this paper will evaluate and discuss the meanings of the terms knowledge, risk, and uncertainty. Once a clear understanding of these terms has been established, the question pertaining to risk will be addressed in detail.

Discussion

The spectrum of knowledge is divided between the two extremes of uncertainty and perfect knowledge. In order to understand risk and how it is different from uncertainty, we first need to understand the meanings of these terms.

The terms risk and uncertainty are used interchangeably in everyday conversation and this makes it difficult to understand their difference. Historically, even the economists have made the mistake of making the same mistake of using these terms loosely. For example, Bastiat (1850) did not made any sharp distinction between the two terms risk and uncertainty.

If we refer to the dictionary, we will see that risk is defined as the possibility of loss or injury where as uncertainty is defined as something that is indeterminable or not known beyond a doubt. Hence, in terms of everyday usage, we will see that risk refers to a positive probability of a negative event from happening where as uncertainty does not really implies a value judgment. However, both these terms are similar in nature and refer to a situation where we cannot completely foresee the future.

If we analyze risk in terms of technology and economics, we will see that it is expressed as a quantifiable value of the event being accompanied with a negative consequence. It is measured as both the probability the event occurring and the gravity of the consequence. For example, the probability of the bearing failing over a period a five years is 0.001 percent. The consequence of the failing of the bearing will result in the engine to stop functioning. These two combine into a single value to indicate risk.

Similarly, in management, the risk associated with a decision will be the possibility that the outcomes will be different from our expectations. Similarly, if we are planning something, the risk will be the different events that can happen, which will result in the project to fall behind schedule or go over the expected cost.

According to Knight (1921), risk is present when future events occur with measureable probability where as uncertainty is present when the likelihood of future events is indefinite or cannot be calculated at all. This means that with uncertainty, we cannot predict the future outcome where as risk is measurable and indicates the probability of a future ...