Risk vs. Uncertainty (Part I)

I can’t believe I didn’t write about it before today: the difference between uncertainty and risk.

I’d originally thought that uncertainty and risk were one and the same. If you’re uncertain about something, about taking some action, and you had to decide whether or not to take that action, it was a risky action to take.

But it’s not like that.

Risk involves known odds. Known probabilities. Known possible outcomes. Uncertainty does not.

Let’s say that you have to throw a die that determines whether or not you live or die based on its outcome. If it’s four or greater you live, if it’s three or less you die. It’s a risk. But it’s not uncertain, because the odds and outcomes are known.

If you were not given the conditions under which you’d live or die, so you don’t know what range of values determines what fate, things get pretty uncertain. You don’t know if throwing any number between 1 through 6 will mean you live or die. Or whether or not living or dying was one of the outcomes you could expect.

To use another analogy, it’s like playing Russian Roulette without knowing how many bullets there are in the chambers and not knowing if the gun is real in the first place.

Under conditions of risk you’re making an informed decision.

Under conditions of uncertainty, however, there is no informed decision except that of the overhanging uncertainty. “I know the outcome and odds are uncertain, but I’m going ahead anyway.”

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Donn

My name is Donn, and you’ll find me working at the intersection of business and information technology, constantly looking for ways to apply IT to business and life to make things better. I’m a big fan of data analysis and its subsequent communication. It always gives me a thrill extracting meaning out of data through analysis, and figuring out the best way to present the findings for maximum impact!

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