A decision is said to be subject to risk when there is a range of possible outcomes which could flow from it and when objectively known probabilities can be attached to these outcomes. Risk is therefore distinguished from uncertainty, where there is a plurality of outcomes to which objective probabilities cannot be assigned. The decision to accept a gamble involving the toss of a coin is a decision subject to risk, since there is more than one possible outcome (heads or tails) and the odds can be calculated. The term risk is being defined at once more broadly and more narrowly than in its everyday usage. A 'risky situation' in everyday terms is generally one in which one of the outcomes involves the decisiontaker in losses - a businessman would not feel he was 'taking a risk' if an investment had two outcomes, one of which resulted in a profit of £10,000, the other of which resulted in a profit of £5,000. Yet, on the strict definition, this is a situation involving risk. On the other hand, the fact that objective probabilities often cannot be assigned means that many situations which in practice are called 'risky' are, on the strict definition, really subject to uncertainty rather than risk.
|Reference: The Penguin Business Dictionary, 3rd edt.|