The upcoming discussion will update you about the difference between risk and uncertainty.
1. Distinction in Nature:
Prof. Knight has said—”Uncertainty is an unknown risk, while Risk is a measurable uncertainty.”
2. Probability of Quantitative Measurement:
Can be quantitatively measured by any form.
Cannot be measured in any form.
3. Insurance and Insurability:
There are certain risks that can be fully covered by taking insurance policies such as fire, flood, draught, theft, robbery etc.
While in uncertainty the insurance is not possible.
Risk can be transferred into another risk.
But uncertainty cannot be transferred.
5. Elements of Cost:
Cost of Risk:
According to Prof. Knight—”Cost of production includes the cost of risk bearing also. Entrepreneur does not get any profit for risk bearing.
Uncertainty on the other-hand is not included in the cost of production The reality is that the profit is the reward of the entrepreneur for bearing uncertainty.
6. Subjective and Objective:
Risk is objective while uncertainty is subjective as Risk can be measured while Uncertainty can only be realised.
7. Knowledge of Alternatives:
All the possible alternatives of a problem are known to the economists in advance.
But in uncertainty such previous knowledge is not possible.
8. Nature of Decisions:
Decisions taken under the conditions of uncertainty are more important than the Risk decisions taken under the conditions of Risk because measurement of alternatives is not possible in case of uncertainty.