The Difference Between Risk and Uncertainty

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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:

In technology and economics, risk is expressed as an expected value that an event will be accompanied by undesirable consequences. It is measured by both the probability of the event and the seriousness of the consequences. For example, the probability that a bearing will fail in five years is .001 percent. The consequence of the bearing failing is that the engine it bears will stop running. These two combine in a single value that communicates risk.
In planning, risk is what can happen that will cause the project to fall behind schedule or go over cost. During planning, the known-unknowns are risk.
In management, risk is the possibility that outcomes will be different from what we expect. It is the effort to manage both the known-unknowns and unknown-unknowns.

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:

The potential for making a less-than-satisfactory decision based on limitations in the certainty of the requirements
The accuracy of best guesses about parameter values and models
The completeness of the understanding of the situation and its physics
The consistency of the team's parameter and model interpretation
The team's differences in viewpoints about what is important

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:

What can go wrong? A system fails.
How likely is it to happen? Probability depends on past statistics and model results.
What are the consequences? Money, time, and possibly even lives are wasted.

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:

What can go wrong? A poor choice is made.
How likely is it to happen? Probability depends on uncertain knowledge and the team's interpretation of information and models.
What are the consequences? Money, time, and possibly lives are wasted.

All of this is good background, but managers are really only interested in answering three questions:

What can go wrong if I choose option X?
How likely is it?
What is the impact?

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:

Envisioning Risk: The risk of solving the wrong problem
Ideation Risk: The risk of not developing good alternatives
Evaluation Risk: The risk of choosing a poor alternative
Strategic Risk: The risk of not following a beneficial strategy

There is a fifth type not addressed:

Execution Risk: The risk of not being able to implement the decision

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.

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