uncertainty and risk

uncertainty and risk

the comparative unpredictability of a firm's future business environment, bringing with it the possibility that the firm might incur losses if future economic and market conditions turn out to be radically different from those anticipated by the firm in, for example, pricing its products, moving into new activities etc.

Since managers cannot foretell the future, they are forced to guess the most likely outcome of any decision. All such estimates must, by their very nature, be subjective, though some estimates will be better than others depending upon the amount and availability of information.

Uncertainty arises because it is difficult to predict changes and to estimate accurately the likelihood of events, including possible losses. Unfortunately, many management decisions are based on this uncertainty, since circumstances rarely repeat themselves and there is little past data available to act as a guide. Such market uncertainty can only be gauged by managers, when launching a new product, through combining the limited data available with their own judgement and experience. Managers can improve upon their subjective estimates by collecting information from forecasts, market research, feasibility studies, etc., but they need to balance the cost of collecting such information against its value in improving decisions.

The term ‘risk’ rather than uncertainty is used to describe business situations where large amounts of information are available about the extent of possible losses and the likelihood of such losses occurring. For example, an insurance company dealing with fire INSURANCE policies and claims from large numbers of manufacturers will be able to compile detailed statistics about numbers of fires and the amount of damage done by each, and can use this information to predict the likelihood of a business experiencing a fire. This detailed statistical information allows the insurance company to charge manufacturers premiums for indemnifying them against fire losses, and thereby to make a profit. By contrast, a single manufacturer would find it very difficult to predict the likelihood of his premises being damaged by fire and the amount of damage, since such an event would probably be a unique experience for him. Faced with a possibility of fire, the manufacturer can either choose to bear the risk of losses resulting from a serious fire or can avoid the risk of fire damage by paying an insurance company a premium to bear the risk. Again, the manufacturer can take the risk that the prices of its main raw materials will be much higher next year, or it can contract now through a commodity FORWARD MARKET to buy raw materials supplies for future delivery at a fixed price. See DECISION TREE, SALES FORECASTING, DISCOUNTED CASH FLOW, BUSINESS CYCLE, SENSITIVITY ANALYSIS.

References in periodicals archive ?
Using these three indicators, the uncertainty and risk distribution (measured through the deviation and skewness) of the single market forecast is recovered from the link between the statistics of the volatility of the three market state trend indicators, assuming the existence of a linear relationship between them.
The performed bibliographic research demonstrates that the concepts of uncertainty and risk are relatively vague--so much so that they often overlap, and the terms are used as synonyms.
In Against the Gods: The Remarkable Story of Risk, Peter Bernstein explains that the concepts of uncertainty and risk are a modern phenomenon.
Uncertainty and Risk: Multidisciplinary Perspectives, edited by Gabriele Bammer and Michael Smithson, 2008, London: Earthscan, 382 pp.
This is best done by adapting existing risk management mechanisms and other processes to be more sensitive to the specific contribution of innovation to uncertainty and risk
The management of uncertainty and risk reduction are viewed as consequences of such experience, thereby facilitating further international commitments that extend and deepen involvement in international markets (Welch and Luostarinen 1988).
If we are to avoid the RUT of program instability, we must accurately describe the uncertainty and risk a program faces, and we must address those items.
Uncertainty and risk are now the usual vocabulary of the managers; stakeholders are also interested about the risk of the business they are connected to.
This article will use the terms uncertainty and risk in their latter meanings since they are more consistent with their implied meanings in the extant corporate governance literature.
* Integral uncertainty value (IUV) and its boundary value represent an original contribution for estimating uncertainty and risk of discussed activities.
Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending.