Risk and Certainty

Chapter 3: Risk and Uncertainty

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Table of Contents
01. Risk vs. uncertainty
Risk vs. uncertainty Sources of uncertainty

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Readings
• Required: Textbook (Chapter 3) • Recommended: Alan and Griffiths (Chapter ) • Further readings:

Risk versus Uncertainty

01

Risk versus Uncertainty

Risk refers to outcome where the range of potential future outcomes is known from pass experience

Risk versus Uncertainty

Uncertainty refers to outcomes where estimates have been made but no probabilities can be attached to the expected outcomes

Sources of Uncertainty

Macroeconomics Risks

Uncertainty

Political change

Supply Conditions

Invention and innovation

Market demand

Sources of Uncertainty
• Changing market demand:
– Depends on consumer tastes and incomes – These changes may be predictable or unforeseen

Sources of Uncertainty
• Changing supply conditions:
– Increases or decreases in the price of raw materials – Shortages or gluts of important components – Uncertainty on the supply side lies in decisions made by competitors or new entrants about investment in new capacity

Sources of Uncertainty
• Invention and Innovation:
– The outcome of such a strategy is uncertain because the outputs and usefulness of the innovations are unknown – Leader or follower

Sources of Uncertainty
• Macroeconomics risks:
– Are linked not to changes in the market but to the economy as a whole – Economic activity tends to be cyclical with periods