How do risk and uncertainty differ in decision making? Provide an example for each.

• A. Risk has known probabilities; uncertainty has unknown probabilities. Example risk: investment with known market volatility; uncertainty: entering a new technology with no historical data.
• B. Risk and uncertainty are the same.
• C. Risk is always bad, uncertainty is good.
• D. Risk has unknown probabilities; uncertainty has known probabilities.

Answer: (A)

In decision making, the key distinction is whether you can quantify the chances of different outcomes. Risk means you have recognized probabilities for those outcomes, so you can model, measure, and compare expected results. Uncertainty means the probabilities are unknown or not well-defined, making it hard or impossible to assign reliable numbers to outcomes.

For risk, an example is investing with historical data and known market volatility—you can estimate likely returns and their chances based on past performance. For uncertainty, try entering a new technology market where there’s little or no historical data and the future opportunities and pitfalls aren’t well understood.

That relationship—risk with known probabilities and uncertainty with unknown probabilities—is why this description fits best. Other ideas suggest they’re the same, or improperly swap where probabilities come from, which doesn’t capture how decision makers must handle measurable versus unknowable chances.