RISK AND UNCERTAINTY- ALL YOU NEED TO KNOW

Uncertainty:

Uncertainty simply means the lack of certainty or sureness of an event. In accounting, uncertainty refers to the inability to foretell consequences or outcomes because there is a lack of knowledge or bases on which to make any predictions

The term is often widely used in financial accounting, especially because there are many events that are beyond a company’s control that can greatly affect its transactions. Since it is much harder to make financial decisions during times of uncertainty, many company owners refrain from making one to avoid creating problems.

For example, let’s say that a business can earn 10% or 20% of profit within the next two years. However, it is uncertain because we cannot measure it. So, there is a kind of probability attached to uncertainty which is improbable in the case of risk.

Risk

Risk is basically the possibility of something bad happening. In business and finance, the risk is the chance that an investment’s actual outcome will differ from the expected outcome. Risks can include the possibility of losing all or some of the original investment in a business. However, risk can be calculated to some extent using historical data and market factors. It’s also important to note that the higher the risk an investor is willing to take, the greater the protentional return. No investment is free of risks, but there are some investments that have lower practical risks than others.There are two main types of financial risk; they are systematic risks and unsystematic risks. 

 Differences Between Risk and Uncertainty

1. Risk is the chance that an investment’s actual outcome will differ from the expected outcome, while uncertainty is the lack of certainty about an event.
2. 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.
3. Risk can be measured and quantified, through theoretical models. Conversely, it is not possible to measure uncertainty in quantitative terms, as the future events are unpredictable.
4. The potential outcomes are known in risk, whereas in the case of uncertainty, the outcomes are unknown.
5. Risk is objective while uncertainty is subjective as Risk can be measured while Uncertainty can only be realised.
6. In risk, probabilities are assigned to a set of circumstances which is not possible in case of uncertainty.
7. Moreover, risks can be controlled if proper measures are taken at the right time; however, uncertainty is beyond control.