To understand the difference between risk and uncertainty begin by exploring what is meant by "risk." Like other terms in this chapter, the term "risk" has many different meanings. If you enter "risk definition" into Google you will get over twenty-five definitions; some are redundant, but there is little consistency. A few definitions that are important here are:
This event-focused view of risk held in the technology and economics fields is too restrictive during the decision-making process. This is because the largest risks are inherent in the uncertainty of information and the knowledge and models on which decisions are based. Decision risk includes:
Planning and management risk are the result of what is uncertain and unknown—decision risk. Decision risk has little to do with events (as in traditional risk analysis) and much to do with what is known and the decisions based on this knowledge. Further, this type of risk cannot be well-modeled using standard probabilities (often called "frequentist" probabilities, the stuff you may have studied in school) and must use Bayesian methods. This is not to say that traditional methods are unimportant, only that decision risk has not been well addressed and is key in early-systems development.
Worded another way, risk traditionally amounts to answering:
During decision-making, risks are inherent in uncertain knowledge, information, and models. Uncertainty creates risk that a poor decision will be made; the questions are then answered this way:
All of this is good background, but managers are really only interested in answering three questions:
One thing is consistent in this discussion:
Without uncertainty, there is no risk.
A corollary is that the more uncertainty, the higher the risk of making a poor decision. Thus, a major goal in decision-making is to manage the uncertainty, especially decision or knowledge uncertainty.
The methods supplied by Robust Decisions help you manage four types of risk:
There is a fifth type not addressed:
Using the Accord tool suite allows you to manage uncertainty and thus decision risk removing concern for the difference between risk and uncertainty. An introduction to managing uncertainty and risk can be found on a companion page.