This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface Introduction and Background
Risk as a Consequence of Uncertainty
Download 5.93 Mb.
|
- Navigate this page:
- States of the World —Uncertainty Consequences—Risk
Risk as a Consequence of Uncertainty We all have a personal intuition about what we mean by the term “risk.” We all use and interpret the word daily. We have all felt the excitement, anticipation, or anxiety of facing a new and uncertain event (the “tingling” aspect of risk taking). Thus, actually giving a single unambiguous definition of what we mean by the notion of “risk” proves to be somewhat difficult. The word “risk” is used in many different contexts. Further, the word takes many different interpretations in these varied contexts. In all cases, however, the notion of risk is inextricably linked to the notion of uncertainty. We provide here a simple definition of uncertainty: Uncertainty is having two potential outcomes for an event or situation. Certainty refers to knowing something will happen or won’t happen. We may experience no doubt in certain situations. Nonperfect predictability arises in uncertain situations. Uncertainty causes the emotional (or physical) anxiety or excitement felt in uncertain volatile situations. Gambling and participation in extreme sports provide examples. Uncertainty causes us to take precautions. We simply need to avoid certain business activities or involvements that we consider too risky. For example, uncertainty causes mortgage issuers to demand property purchase insurance. The person or corporation occupying the mortgage-funded property must purchase insurance on real estate if we intend to lend them money. If we knew, without a doubt, that something bad was about to occur, we would call it apprehension or dread. It wouldn’t be risk because it would be predictable. Risk will be forever, inextricably linked to uncertainty. As we all know, certainty is elusive. Uncertainty and risk are pervasive. While we typically associate “risk” with unpleasant or negative events, in reality some risky situations can result in positive outcomes. Take, for example, venture capital investing or entrepreneurial endeavors. Uncertainty about which of several possible outcomes will occur circumscribes the meaning of risk. Uncertainty lies behind the definition of risk. While we link the concept of risk with the notion of uncertainty, risk isn’t synonymous with uncertainty. A person experiencing the flu is not necessarily the same as the virus causing the flu. Risk isn’t the same as the underlying prerequisite of uncertainty. Risk (intuitively and formally) has to do with consequences (both positive and negative); it involves having more than two possible outcomes (uncertainty). [1]The consequences can be behavioral, psychological, or financial, to name a few. Uncertainty also creates opportunities for gain and the potential for loss. Nevertheless, if no possibility of a negative outcome arises at all, even remotely, then we usually do not refer to the situation as having risk (only uncertainty) as shown in Figure 1.2 "Uncertainty as a Precondition to Risk". Figure 1.2 Uncertainty as a Precondition to Risk 
Table 1.1 Examples of Consequences That Represent Risks
Directory: site -> textbooks textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface textbooks -> Chapter 1 Introduction to Law textbooks -> 1. 1 Why Launch! textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License textbooks -> This text was adapted by The Saylor Foundation under a textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License textbooks -> Chapter 1 What Is Economics? textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License Download 5.93 Mb. Share with your friends:
|