The fact that risk and uncertainty are experienced differently might matter in times of financial crisis....

The fact that risk and uncertainty are experienced differently might matter in times of financial crisis. Discuss

Expert Solution

Risk and Uncertainty are related concepts and have a little difference. The former is the quantifiable parameter and based on historic projections and past models. It is more based on the future probabilities which can be calculated. However, the latter, Uncertainty does not depend on any calculated events or it cannot be predictable.

The distinction between the two was primarily drawn by Frank Knight and John Maynard Keynes in the 1920s. Even in the current scenarios of decision making in financial industry, this is being used. With regards to uncertainty, it is unable to predict how a future disaster might unfold, even if some might have a hunch about the triggering conditions, which was witnessed in case of history of market corrections. Moreover, financial calamities can also be caused by the connection of finance with outside forces. Geopolitical issues or global security problems such as the threat of terrorism continue to mark away the resilience of our current economic and political systems. Then there are unanticipated events like Brexit – which are led by a new class of politicians who are openly challenging the status quo, not with new ideas or reconciliation.

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