Risks and uncertainties

Risks and uncertainties
Primary topic
Related topics
Methods and techniques

Risk and uncertainties reflect unpredictable changes of environment and behaviours of people[1].

These concepts are important for business activity because running your own business is directly related to taking and calculating risk and uncertainty[2].

Risk – the probability that business entity make a loss as a result of the economic decision being taken[3].

Uncertainty includes changes that are difficult to calculate and events that we can not estimate due to little information[4].

Difference between the concepts of risk and uncertainty[edit]

Despite the explicit difference between risk and uncertainty, they are usually used to determine the same thing[5].

Uncertainty is an immeasurable phenomenon. The measurable part is called risk[6][7].

"Risk refers to situations in which probabilities targets can be identified for possible results. In other words it can be quantified. Instead, uncertainty refers to situations or events about which there is sufficient information to identify objective probabilities.

The key- element in making the distinction between risk and uncertainty is probability. Probability refers to a particular phenomenon or event to occur under well -defined conditions.

Depending on the probability can be distinguished three categories of situations can be distinguished:

The state of absolute certainty implies an accurate knowledge of influent economic phenomena and factors, a strict control of the time of occurrence of effects obtained which in terms of mathematical probability theory is a probability of occurrence and development of that economic phenomenon equal to 1.

The state of uncertainty means a set of conditions and factors, unidentified and unpredictable in terms of occurrence and evolution; even if they are identified and predicted they are highly unstable, their probability being 0.

The state of riskis when, with an economic probability greater than 0 but less than 1, it may be determined the occurrnece and evolution of economic phenomena, the influence of factors and their possible effects" that is how Ms. Toma describes in the article (Toma S. V. and others, (2012)[8].

Elements related to the concept of risk[edit]

Mr. Strand notices in his article "Basic textbooks of risk analysis will often explain the concept as containing two dimensions. The first dimension is the degree of possibility that an event will take place, and the second is the consequences of this event." (Strand R.,2009)[9].

In each company, the pursuit of risk reduction and control should be one of the main action[10].

The types of risk control are[11]:

  • Avoidance the risk - is the basic way to limit potential losses caused by natural disasters.
  • Risk reduction - is taken to try to reduce the frequency and size of potential damage.

The company should always collect information that will help identify and develop an optimal risk management process[12].

Risk management process consists of four consecutive stages[13]:

Risks and its sources[14]:

  • investment risks
  • market risks
  • technological risks
  • innovation risks
  • financial risks
  • regulatory risks

Elements related to the concept of uncertainty[edit]

Types of uncertainty

"I know what I do not know" - probability distribution is theoretically possible, but in practice we do not have the right data, the correct mathematical model or sufficient computing power.

"I do not know what I do not know" - in this case talking about probability is pointless[15].

Uncertainty is included[16]:

  • uncertainty of the state (misunderstanding of events and directions of development of the environment, no possibility of changing them)
  • uncertainty of the effect (no possibility to predict external influence on the organization)
  • uncertainty of reaction (shows the types of responses to the dynamics of the environment)

Level of uncertainty

  • Lack of uncertainty (certainty) occurs when the results can be predictable with high accuracy, for example: natural sciences, laws of physics, mathematics.
  • Level 1 (objective uncertainty) occurs when the results are predictable and the probability known, e.g. gambling.
  • Level 2 (subjective uncertainty), as a result we can predict, but unknown probability, e.g. random accidents.
  • Level 3 probability and results are unknown, e.g.: scientific research, genetic engineering[17].

Uncertainty to appear in many areas, for example in insurance, philosophy, physics, statistics, economics, finance or IT[18].

Conclusions[edit]

Risk is something variable, is rather a process than the state of the environment[19].

As the authors suggest "A series of studies provides support for this principle in decision under both risk and uncertainty and shows that people are less sensitive to uncertainty than to risk" (Toma S. V. and others, (2012)[20].

Risk and uncertainty are multidimensional concepts that are difficult to clearly identify, therefore one universal and unambiguous definition can not be used for them[21].

References[edit]

Footnotes[edit]

  1. Mishra,P.K.(2011)
  2. Toma S. V. and others (2012)
  3. Strand R., Oughton D. and others(2009)
  4. Mishra,P.K.(2011)
  5. Toma S. V. and others (2012)
  6. Mishra,P.K.(2011)
  7. Strand R., Oughton D. and others(2009)
  8. Toma S. V. and others (2012)
  9. Strand R., Oughton D. and others(2009)
  10. Strand R., Oughton D. and others(2009)
  11. Strand R., Oughton D. and others(2009)
  12. Strand R., Oughton D. and others(2009)
  13. Strand R., Oughton D. and others(2009)
  14. Mishra,P.K.(2011)
  15. Mishra,P.K.(2011)
  16. Mishra,P.K.(2011)
  17. Mishra,P.K.(2011)
  18. Strand R., Oughton D. and others(2009)
  19. Strand R., Oughton D. and others(2009)
  20. Toma S. V. and others (2012)
  21. Strand R., Oughton D. and others(2009)

Author: Daria Ziętara