Difference between risk and uncertainty
Introduction
Worldwide presence of business and investment, terms such as risk and uncertainty are used that many times They are used interchangeably, but do we really know what the difference is between the two? In this article we will explore the key differences between risk and uncertainty and how they can affect our financial decisions.
Risk
Risk is a term used to refer to a situation in which the possibilities of a given outcome are known, but it cannot be assured with certainty that that outcome will occur. In other words, risk implies a certain measure of predictability. For example, if we invest in a mutual fund that has had a track record of good results, we can assume that there is a high risk that our money will grow, but we cannot guarantee that this will happen.
types of risk
There are different types of risk; some of the most common are:
- Market risk: refers to the possibility that changes in financial markets negatively affect the investment.
- Credit risk: refers to the possibility that the entity issuing an investment does not pay its obligations.
- Liquidity risk: refers to the possibility that an investment cannot be sold quickly due to a lack of buyers.
Uncertainty
Unlike risk, uncertainty refers to a scenario in which the possibilities of an outcome are unknown or unpredictable. In this case, there is no historical data or information available to make a concrete prediction. For example, if a company is evaluating whether to expand its business into a new market, it cannot be sure how the situation will develop in that market.
Deal with uncertainty
In the financial world, decisions often have to be made despite uncertainty. To do so, certain factors can be taken into account, such as:
- Trend analysis: look for patterns or trends in the available data to make a prediction.
- Investigation: Gather additional information to evaluate the situation more accurately.
- Scenario analysis: creating different hypothetical scenarios of what could happen with different variables.
Conclusion
In short, risk refers to a situation in which the chances of an outcome are known but not guaranteed, while uncertainty refers to a scenario in which there is not enough information to make a concrete prediction. Although both situations can arise in the financial world, it is important to understand the difference between them and how they can affect our decisions.