Updated: Aug 20, 2021

One of a number of terms defined much more narrowly in economics than in everyday usage (others are investment, cost and profit). The classical definition of uncertainty, first given by F. H. Knight, is that uncertainty exists when there is more than one possible outcome to a course of action, the form of each possible outcome is known, but the probability of getting any one outcome is not known. lf the probabilities of obtaining certain outcomes are known, then this situation is one of risk. For example, suppose I make a bet with you that if I toss a coin, and it falls heads, I pay you £1, while if it falls tails, you pay me £1. To you, there are two possible outcomes of the decision to play this game: receiving £1 or paying £1. lf the coin has not been tampered with in any way, we can say that the chances of its falling heads are fifty-fifty, i.e. there is a probability of 0,5 that it will be heads or tails. Since the probabilities or the outcomes are known, this is therefore a situation of risk. Suppose, however, that instead of tossing a coin I had made the bet contingent on whether or not the next motor car which passes us has an A or an E in its licence number. Since you are not likely to know the probabilities of these two events, the problem facing you is one of uncertainty.

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.